[go: up one dir, main page]

IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/80206.html
   My bibliography  Save this paper

Liability in Markets for Credence Goods

Author

Listed:
  • Chen, Yongmin
  • Li, Jianpei
  • Zhang, Jin
Abstract
We study the role of liability in disciplining an expert's behavior in a credence good market. The expert, who can provide two potential treatments for a consumer's problem, may misbehave in two ways: prescribing the "wrong" treatment given his private information, or failing to exert proper effort to diagnose the problem. We show that under a range of liability rules, the expert will choose the efficient treatment based on his information if the price margins for the two treatments are close enough. Moreover, a well-designed liability rule can motivate the expert to choose efficiently both the treatment and the diagnosis effort. This efficiency result continues to hold when the expert's diagnosis effort generates only a noisy signal about the nature of the consumer's problem, provided the signal is sufficiently informative.

Suggested Citation

  • Chen, Yongmin & Li, Jianpei & Zhang, Jin, 2017. "Liability in Markets for Credence Goods," MPRA Paper 80206, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:80206
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/80206/1/MPRA_paper_80206.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Yuk-fai Fong, 2005. "When Do Experts Cheat and Whom Do They Target?," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 113-130, Spring.
    2. Fong, Yuk-fai & Liu, Ting & Wright, Donald J., 2014. "On the role of verifiability and commitment in credence goods markets," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 118-129.
    3. Ting Liu, 2011. "Credence Goods Markets With Conscientious And Selfish Experts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 227-244, February.
    4. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March.
    5. Dulleck, Uwe & Kerschbamer, Rudolf, 2009. "Experts vs. discounters: Consumer free-riding and experts withholding advice in markets for credence goods," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 15-23, January.
    6. Demski, Js & Sappington, Dem, 1987. "Delegated Expertise," Journal of Accounting Research, Wiley Blackwell, vol. 25(1), pages 68-89.
    7. Ingela Alger & François Salanié, 2006. "A Theory of Fraud and Overtreatment in Experts Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 853-881, December.
    8. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    9. Marilyn J. Simon, 1982. "Diagnoses and Medical Malpractice: A Comparison of Negligence and Strict Liability Systems," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 170-180, Spring.
    10. Nathaniel G. Hilger, 2016. "Why Don't People Trust Experts?," Journal of Law and Economics, University of Chicago Press, vol. 59(2), pages 293-311.
    11. Wolfgang Pesendorfer & Asher Wolinsky, 2003. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 417-437.
    12. Xinyu Hua, 2011. "Product Recall and Liability," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(1), pages 113-136.
    13. Donald J., Wright, 2011. "Medical malpractice and physician liability under a negligence rule," International Review of Law and Economics, Elsevier, vol. 31(3), pages 205-211, September.
    14. Shavell, Steven, 2007. "Liability for Accidents," Handbook of Law and Economics, in: A. Mitchell Polinsky & Steven Shavell (ed.), Handbook of Law and Economics, edition 1, volume 1, chapter 2, pages 139-182, Elsevier.
    15. Jennifer Arlen & W. Bentley MacLeod, 2005. "Torts, Expertise, and Authority: Liability of Physicians and Managed Care Organizations," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 494-519, Autumn.
    16. Kathryn E. Spier, 2011. "Product Safety, Buybacks, and the Post-Sale Duty to Warn," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(3), pages 515-539.
    17. Dulleck, Uwe & Wigger, Berthold U., 2015. "Politicians as experts, electoral control, and fiscal restraints," Journal of Public Economics, Elsevier, vol. 121(C), pages 106-116.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fong, Yuk-fai & Liu, Ting, 2018. "Liability and reputation in credence goods markets," Economics Letters, Elsevier, vol. 166(C), pages 35-39.
    2. Ritzer-Angerer Petra, 2020. "Was bedeuten die Vertrauensguteigenschaften der Jahresabschlussprüfung für die Regulierung der Wirtschaftsprüferhaftung?," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 69(2), pages 89-119, August.
    3. Antoci, Angelo & Fiori Maccioni, Alessandro & Russu, Paolo & Sacco, Pier Luigi, 2022. "Curing is caring? Liability reforms, defensive medicine and malpractice litigation in a post-pandemic world," Socio-Economic Planning Sciences, Elsevier, vol. 80(C).
    4. Chen, Yizheng & Li, Jingkui & Tian, Guoqiang, 2022. "Reputation and liability in experience goods markets with imperfect monitoring," Economics Letters, Elsevier, vol. 220(C).
    5. Ritzer-Angerer Petra, 2020. "Was bedeuten die Vertrauensguteigenschaften der Jahresabschlussprüfung für die Regulierung der Wirtschaftsprüferhaftung?," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 69(2), pages 89-119, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yongmin Chen & Jianpei Li & Jin Zhang, 2022. "Efficient Liability In Expert Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1717-1744, November.
    2. Helmut Bester & Matthias Dahm, 2018. "Credence Goods, Costly Diagnosis and Subjective Evaluation," Economic Journal, Royal Economic Society, vol. 128(611), pages 1367-1394, June.
    3. Bester, Helmut & Ouyang, Yaofu, 2018. "Optimal procurement of a credence good under limited liability," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 96-129.
    4. Fang Liu & Alexander Rasch & Marco A. Schwarz & Christian Waibel, 2020. "The role of diagnostic ability in markets for expert services," Working Papers 2020-07, Faculty of Economics and Statistics, Universität Innsbruck.
    5. Balafoutas, Loukas & Kerschbamer, Rudolf, 2020. "Credence goods in the literature: What the past fifteen years have taught us about fraud, incentives, and the role of institutions," Journal of Behavioral and Experimental Finance, Elsevier, vol. 26(C).
    6. Li, Jianpei & Ouyang, Yaofu, 2016. "Expert Costs and the Role of Verifiability," MPRA Paper 74390, University Library of Munich, Germany.
    7. Martin Obradovits & Philipp Plaickner, 2024. "Searching for Treatment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 180(1), pages 144-186.
    8. Katharina Momsen & Markus Ohndorf, 2022. "Seller Opportunism in Credence Good Markets – The Role of Market Conditions," Working Papers 2022-10, Faculty of Economics and Statistics, Universität Innsbruck.
    9. Dominik Erharter, 2012. "Credence goods markets, distributional preferences and the role of institutions," Working Papers 2012-11, Faculty of Economics and Statistics, Universität Innsbruck.
    10. Liu, Ting & Ma, Ching-to Albert, 2024. "Equilibrium information in credence goods," Games and Economic Behavior, Elsevier, vol. 145(C), pages 84-101.
    11. David Bardey & Denis Gromb & David Martimort & Jérôme Pouyet, 2020. "Controlling Sellers Who Provide Advice: Regulation and Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 68(3), pages 409-444, September.
    12. Dulleck, Uwe & Kerschbamer, Rudolf & Konovalov, Alexander, 2014. "Too Much or Too Little? Price-Discrimination in a Market for Credence Goods," Working Papers in Economics 582, University of Gothenburg, Department of Economics, revised Apr 2014.
    13. Ouyang, Yaofu, 2016. "Credence Goods, Risk Averse, and Optimal Insurance," MPRA Paper 70392, University Library of Munich, Germany.
    14. Cao, Yiran & Chen, Yongmin & Ding, Yucheng & Zhang, Tianle, 2022. "Search and competition in expert markets," MPRA Paper 122509, University Library of Munich, Germany, revised 27 Oct 2024.
    15. Bertrand Crettez & Régis Deloche & Marie‐Hélène Jeanneret‐Crettez, 2020. "A demand‐induced overtreatment model with heterogeneous experts," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(5), pages 1713-1733, September.
    16. David Bardey & Denis Gromb & David Martimort & Jérôme Pouyet, 2016. "Drugs, Showrooms and Financial Products: Competition and Regulation when Sellers Provide Expert Advice," PSE Working Papers halshs-01400841, HAL.
    17. Balafoutas, Loukas & Fornwagner, Helena & Kerschbamer, Rudolf & Sutter, Matthias & Tverdostup, Maryna, 2020. "Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets," IZA Discussion Papers 13848, Institute of Labor Economics (IZA).
    18. Schneider, Tim & Meub, Lukas & Bizer, Kilian, 2021. "Consumer information in a market for expert services: Experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 94(C).
    19. Fong, Yuk-fai & Liu, Ting & Wright, Donald J., 2014. "On the role of verifiability and commitment in credence goods markets," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 118-129.
    20. Laurens G. Debo & L. Beril Toktay & Luk N. Van Wassenhove, 2008. "Queuing for Expert Services," Management Science, INFORMS, vol. 54(8), pages 1497-1512, August.

    More about this item

    Keywords

    Credence goods; private information; diagnosis effort; undertreatment; overtreatment; liability;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:80206. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.