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Optimal procurement of a credence good under limited liability

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  • Bester, Helmut
  • Ouyang, Yaofu

Abstract

This paper analyzes the optimal contract for a consumer to procure a credence good from an expert when (i) the expert might misrepresent his private information about the consumer’s need, (ii) the expert might not choose the requested service since his choice of treatment is non-observable, and (iii) limited liability of the expert precludes imposing penalty payments on him. We characterize payments under the optimal contract and show that, compared with the first–best, these induce inefficient undertreatment. We further analyze the implications of separating diagnosis and treatment for efficiency and consumer surplus.

Suggested Citation

  • Bester, Helmut & Ouyang, Yaofu, 2018. "Optimal procurement of a credence good under limited liability," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 96-129.
    • Handle: RePEc:eee:indorg:v:61:y:2018:i:c:p:96-129
    DOI: 10.1016/j.ijindorg.2018.08.008
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    4. Jost, Peter-J. & Reik, Steffen & Ressi, Anna, 2021. "The information paradox in a monopolist’s credence goods market," International Journal of Industrial Organization, Elsevier, vol. 75(C).
    5. Jost, Peter-J. & Reik, Steffen & Ressi, Anna, 2019. "Information in a Monopolist's Credence Good Market," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203555, Verein für Socialpolitik / German Economic Association.
    6. Groß, Marcus & Rendtel, Ulrich & Schmid, Timo & Tzavidis, Nikos, 2018. "Switching between different area systems via simulated geocoordinates: A case study for student residents in Berlin," Discussion Papers 2018/2, Free University Berlin, School of Business & Economics.
    7. Ritzer-Angerer Petra, 2020. "Was bedeuten die Vertrauensguteigenschaften der Jahresabschlussprüfung für die Regulierung der Wirtschaftsprüferhaftung?," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 69(2), pages 89-119, August.

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    More about this item

    Keywords

    Credence goods; Non-observable treatments; Hidden information; Moral hazard; Limited liability;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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