DP3016 On Doctors, Mechanics and Computer Specialists. Or Where are the Problems with Credence Goods?

Author(s): Uwe Dulleck, Rudolf Kerschbamer
Publication Date: October 2001
Keyword(s): credence goods, experts, fraud
JEL(s): D40, D82, L15
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3016

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 behaviour of experts and consumers in credence goods markets sensitively depends on the details of the models. The present Paper shows that the results for the majority of the specified 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 are satisfied, and virtually all existing results on inefficiencies in the credence good market are obtained by relaxing one of these conditions. 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.