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Free keywords:
Credence goods, diagnostic uncertainty, insurance coverage, social preferences
JEL:
D82 - Asymmetric and Private Information; Mechanism Design
JEL:
G22 - Insurance; Insurance Companies; Actuarial Studies
Abstract:
In markets for credence goods – such as health care or repair services – fraudulent behavior by better informed experts is a common problem. Our model studies how four common features shape experts’ provision behavior in credence goods markets: (i) diagnostic uncertainty of experts; (ii) insurance coverage of consumers; (iii) malpractice payments for treatment failure; and (vi) consumer-regarding preferences of experts. Diagnostic imprecision unambiguously leads to less efficient provision. Insurance coverage and malpractice payments have an ambiguous effect on efficient provision. The impact of consumer-regarding preferences on efficiency is positive without insurance but ambiguous in the presence of insurance.
