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Preventive-service fraud in credence good markets

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  • Edi Karni

    (Johns Hopkins University)

Abstract

Preventive dental care and automotive service is intended to preempt problems that, if they materialized, would require costly treatment or repair. In these markets fraud is both persistent and pervasive. This paper analyzes these markets invoking the notion of perfect Bayesian equilibrium of a stochastic dynamic games of incomplete information in which the players are customers and service providers. The services provided are credence because diagnosis and service are bundled and the customers lack the expertise necessary to assess the need for the prescribed service both ex ante and ex post. The analysis shows that fraud is a prevalent equilibrium phenomenon that is somewhat mitigated by customers’ loyalty.

Suggested Citation

  • Edi Karni, 2024. "Preventive-service fraud in credence good markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 78(2), pages 593-617, September.
    • Handle: RePEc:spr:joecth:v:78:y:2024:i:2:d:10.1007_s00199-023-01540-x
    DOI: 10.1007/s00199-023-01540-x
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    References listed on IDEAS

    as
    1. Balafoutas, Loukas & Kerschbamer, Rudolf, 2020. "Credence goods in the literature: What the past fifteen years have taught us about fraud, incentives, and the role of institutions," Journal of Behavioral and Experimental Finance, Elsevier, vol. 26(C).
    2. Wolfgang Pesendorfer & Asher Wolinsky, 2003. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 417-437.
    3. Beck, Adrian & Kerschbamer, Rudolf & Qiu, Jianying & Sutter, Matthias, 2014. "Car mechanics in the lab––Investigating the behavior of real experts on experimental markets for credence goods," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 166-173.
    4. Yongmin Chen & Jianpei Li & Jin Zhang, 2022. "Efficient Liability In Expert Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1717-1744, November.
    5. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    6. Chiu, Yen-Lin & Karni, Edi, 2021. "Competitive equilibrium fraud in markets for credence-goods," Journal of Mathematical Economics, Elsevier, vol. 96(C).
    7. Felix Gottschalk & Wanda Mimra & Christian Waibe, 2020. "Health Services as Credence Goods: a Field Experiment," The Economic Journal, Royal Economic Society, vol. 130(629), pages 1346-1383.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Credence goods; Preventive-services fraud; Stochastic game of incomplete information;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D69 - Microeconomics - - Welfare Economics - - - Other
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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