On Doctors, Mechanics and Computer Specialists or Where are the Problems with Credence Goods

University of Vienna, Economics Working Paper No. 0101

44 Pages Posted: 24 Jan 2001

See all articles by Uwe Dulleck

Uwe Dulleck

University of Vienna - Department of Economics

Rudolf Kerschbamer

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

Date Written: January 2001

Abstract

With credence goods consumers cannot judge the quality they receive compared to the quality they need. The needed quality can only be observed by an expert seller who may exploit the information asymmetry by cheating. In recent years various contributions have analyzed the credence goods problem under a wide variety of assumptions yielding equilibria exhibiting various degrees of inefficiencies and fraud. The variety of results has fostered the impression that the equilibrium behavior of experts and consumers in the credence goods market sensitively depends on the details of the models. More disturbingly, apparently similar models often lead to contradicting results. The present paper shows that the results for the majority of the specific models can be reproduced in a very simple unifying framework. Our model is constructed so that an efficient solution is reached if a small number of critical assumptions is satisfied, and virtually all existing results on inefficiencies in the credence good market are obtained by relaxing one of these conditions. Thus, our simple unifying model not only permits a clearer discrimination between situations in which market institutions solve the fraudulent expert problem without any cost and those where they do not; it also helps to identify the forces driving the various inefficiency results in the literature. Existing results are generalized, some previous interpretations of the forces leading to the striking differences in outcomes are questioned, and a new source for inefficiencies is identified.

Keywords: Credence Goods, Experts, Fraud

JEL Classification: L15, D82, D40

Suggested Citation

Dulleck, Uwe and Kerschbamer, Rudolf, On Doctors, Mechanics and Computer Specialists or Where are the Problems with Credence Goods (January 2001). University of Vienna, Economics Working Paper No. 0101, Available at SSRN: https://ssrn.com/abstract=256694 or http://dx.doi.org/10.2139/ssrn.256694

Uwe Dulleck (Contact Author)

University of Vienna - Department of Economics ( email )

Bruennerstrasse 72
Vienna, A-1210
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+43 1 4277 374 ext. 27 (Phone)
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Rudolf Kerschbamer

University of Innsbruck ( email )

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

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Centre for Economic Policy Research (CEPR)

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United Kingdom