Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets

82 Pages Posted: 11 Nov 2020

See all articles by Loukas Balafoutas

Loukas Balafoutas

University of Innsbruck

Helena Fornwagner

University of Regensburg

Rudolf Kerschbamer

University of Innsbruck; Centre for Economic Policy Research (CEPR)

Matthias Sutter

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Maryna Tverdostup

affiliation not provided to SSRN

Multiple version iconThere are 3 versions of this paper

Date Written: November 6, 2020

Abstract

Credence goods markets – like for health care or repair services – with their informational asymmetries between sellers and customers are prone to fraudulent behavior of sellers and resulting market inefficiencies. We present the first model that considers both diagnostic uncertainty of sellers and the effects of insurance coverage of consumers in a unified framework. We test the model’s predictions in a laboratory experiment. Both in theory and in the experiment diagnostic uncertainty decreases the rate of efficient service provision and leads to less trade. In theory, insurance also decreases the rate of efficient service provision, but at the same time it also increases the volume of trade, leading to an ambiguous net effect on welfare. In the experiment, the net effect of insurance coverage on efficiency turns out to be positive. We also uncover an important interaction effect: if consumers are insured, experts invest less in diagnostic precision. We discuss policy implications of our results.

Keywords: Credence goods, diagnostic uncertainty, insurance coverage, welfare, model, experiment

JEL Classification: C91, C72, D82, G22

Suggested Citation

Balafoutas, Loukas and Fornwagner, Helena and Kerschbamer, Rudolf and Sutter, Matthias and Tverdostup, Maryna, Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets (November 6, 2020). MPI Collective Goods Discussion Paper, No. 2020/26, Available at SSRN: https://ssrn.com/abstract=3726066 or http://dx.doi.org/10.2139/ssrn.3726066

Loukas Balafoutas

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Helena Fornwagner

University of Regensburg ( email )

Universitstrasse 31
Regensberg D-93053
Germany

HOME PAGE: http://www.helenafornwagner.com

Rudolf Kerschbamer

University of Innsbruck ( email )

Universitaetsstrasse 15
Innsbruck, A - 6020
Austria
+43 512 507 7400 (Phone)
+43 512 507 2980 (Fax)

HOME PAGE: http://www.uibk.ac.at/c/c4/c409/staff/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Matthias Sutter (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Maryna Tverdostup

affiliation not provided to SSRN

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