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Expert Costs and the Role of Verifiability

Author

Listed:
  • Jianpei Li
  • Yaofu Ouyang
  • Wanzhu Zhang

Abstract

We analyze a credence goods market where the expert may have a high or low cost in repairing a major problem, assuming that (i) the expert is liable for the outcome of the treatment (liability), and (ii) the type of treatment is verifiable by the consumer (verifiability). With just liability, an inefficiency arises because not all major problems are resolved in equilibrium. With both verifiability and liability, another inefficiency arises because minor problems are sometimes fixed through costly major treatments (overtreatment). Adding verifiability improves social welfare because a major problem is resolved with a higher probability despite the overtreatment costs.

Suggested Citation

  • Jianpei Li & Yaofu Ouyang & Wanzhu Zhang, 2024. "Expert Costs and the Role of Verifiability," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 180(1), pages 17-42.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2023-0029
    DOI: 10.1628/jite-2023-0029
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    More about this item

    Keywords

    credencegoods; treatmentcosts; liability; verifiability; credence goods; treatment costs;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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