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The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition

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  • Uwe Dulleck
  • Rudolf Kerschbamer
  • Matthias Sutter

Abstract

Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market breakdown. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that liability or verifiability yield efficiency, we find that liability has a crucial, but verifiability at best a minor, effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated. (JEL D12, D82)

Suggested Citation

  • Uwe Dulleck & Rudolf Kerschbamer & Matthias Sutter, 2011. "The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition," American Economic Review, American Economic Association, vol. 101(2), pages 526-555, April.
    • Handle: RePEc:aea:aecrev:v:101:y:2011:i:2:p:526-55
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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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    1. The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition (AER 2011) in ReplicationWiki

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