Citation

Discussion Paper Details

Please find the details for DP10254 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Credence Goods, Costly Diagnosis, and Subjective Evaluation

Author(s): Helmut Bester and Matthias Dahm

Publication Date: November 2014

Keyword(s): credence goods, information acquisition, moral hazard and subjective evaluation

Programme Area(s): Industrial Organization

Abstract: We study contracting between a consumer and an expert. The expert can invest in diagnosis to obtain a noisy signal about whether a low-cost service is sufficient or whether a high-cost treatment is required to solve the consumer?s problem. This involves moral hazard because diagnosis effort and signals are not observable. Treatments are contractible, but success or failure of the low-cost treatment is observed only by the consumer. Payments can therefore not depend on the objective outcome but only the consumer?s report, or subjective evaluation. A failure of the low-cost treatment delays the solution of the consumer?s problem by the high-cost treatment to a second period. We show that the first-best solution can always be implemented if the parties? discount rate is zero; an increase in the discount rate reduces the range of parameter combinations for which the first-best can be obtained. In an extension we show that the first-best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10254

Bibliographic Reference

Bester, H and Dahm, M. 2014. 'Credence Goods, Costly Diagnosis, and Subjective Evaluation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10254