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Mandate or delegate? the optimal contract for credence goods with the expert’s endeavor

Author

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  • Wu, Cheng-Tai
  • Tsai, Tsung-Sheng

Abstract

We consider a market for credence goods where a consumer does not know her problem (either major or minor), and an expert can perform a treatment to fix the problem as well as make an effort to improve the effect of treatment. The consumer can offer a contract in which she mandates a specific treatment or a contract which she delegates to the expert who chooses the treatment and is also induced to reveal the consumer’s type. We find that the delegation contract can be the best contract when the high-level treatment is moderately more efficient than the low-level treatment in fixing the minor problem. This is because the delegation contract leads to a more efficient effort decision which can compensate for the efficiency loss from insufficient treatment. Therefore, the consumer may prefer to be under-treated for the minor problem even though the high-level treatment should have been mandated if she had known her type.

Suggested Citation

  • Wu, Cheng-Tai & Tsai, Tsung-Sheng, 2025. "Mandate or delegate? the optimal contract for credence goods with the expert’s endeavor," Journal of Economic Behavior & Organization, Elsevier, vol. 229(C).
    • Handle: RePEc:eee:jeborg:v:229:y:2025:i:c:s0167268124004773
    DOI: 10.1016/j.jebo.2024.106863
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    More about this item

    Keywords

    Credence goods; Moral hazard; Delegation; Under-treatment;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services

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