The economics of credence goods: An experimental investigation of the role of verifiability, liability, competition and reputation in credence goods markets

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 break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only 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.

The economics of credence goods : an experiment on the role of liability, verifiability, reputation and competition

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)

Experts vs. Discounters: Consumer Free Riding and Experts Withholding Advice in Markets for Credence Goods

This paper studies the incentives for credence goods experts to invest effort in diagnosis if effort is both costly and unobservable, and if they face competition by discounters who are not able to perform a diagnosis. The unobservability of diagnosis effort and the credence characteristic of the good induce experts to choose incentive compatible tariff structures. This makes them vulnerable to competition by discounters. We explore the conditions under which honestly diagnosing experts survive competition by discounters; we identify situations in which experts misdiagnose consumers in order to prevent them from free-riding on experts' advice; and we discuss policy options to solve the free-riding consumers–cheating experts problem.

Verifiability in Markets for Credence Goods

Theory predicts that efficiency prevails on credence goods markets if customers are able to verify which quality they receive from an expert seller. In a series of experiments with endogenous prices we observe that variability fails to result in efficient provision behavior and leads to very similar results as a setting without variability. Some sellers always provide appropriate treatment even if own money maximization calls for over- or undertreatment. Overall our endogenous price-results suggests that both inequality aversion and a taste for efficiency play an important role for experts provision behavior. We contrast the implications of those two motivations theoretically and discriminate between them empirically using a �xed-price design. We then classify experimental experts according to their provision behavior.

How distributional preferences shape incentives on (experimental) markets for credence goods

Credence goods markets suffer from inefficiencies caused by superior information of sellers about the surplus-maximizing quality. While standard theory predicts that equal mark-up prices solve the credence goods problem if customers can verify the quality received, experimental evidence indicates the opposite. We identify a lack of robustness of institutional design with respect to heterogeneity in distributional preferences as a possible cause and design new experiments that allow for parsimonious identification of sellers’ distributional types. Our results indicate that less than a fourth of the subjects behave according to standard theory’s assumption, the rest behaving either in line with non-standard selfish or in accordance with non-trivial other-regarding preferences. We discuss consequences of our findings for institutional design and agent selection.

Contracting for infrastructure projects as credence goods

Large infrastructure projects are a major responsibility of urban and regional governments, who usually lack expertise to fully specify the demanded projects. Contractors, typically experts on such projects due to experience with similar projects elsewhere, advise of the needed design in their bids. Producing the right design is nevertheless costly. We model such infrastructure projects taking into account their credence goods feature and the costly design effort they require and examine the performance of commonly used contracting methods. We show that when building costs are homogeneous and public information, multi-stage competitive bidding involving shortlisting of two contractors and contingent compensation of both contractors on design efforts outperforms sequential search and the traditional Design-and-Build approach. If building costs are private information of the contractors and are revealed to them after design cost is sunk, sequential search may be superior to the other two methods.

Contracting for infrastructure projects as credence goods

Large infrastructure projects are a major responsibility of urban and regional governments, who usually lack expertise to fully specify the demanded projects. Contractors, typically experts on such projects due to experience with similar projects,advise of the needed design as well as the cost of construction in their bids. Producing the right design is costly. We model such infrastructure projects taking into account their credence goods feature and the costly design effort they require and examine the performance of commonly used contracting methods. We show that when building costs are homogeneous and public information, simultaneous bidding involving shortlisting of two contractors and contingent compensation of both contractors on design efforts outperforms sequential search. If building costs are private information of the contractors and are revealed to them after design cost is sunk,sequential search may be superior to simultaneous bidding.

How social preferences shape incentives in (experimental) markets for credence goods

Credence goods markets suffer from inefficiencies caused by superior information of sellers about the surplus-maximising quality. While standard theory predicts that equal mark-up prices solve the credence goods problem if customers can verify the quality received, experimental evidence indicates the opposite. We identify a lack of robustness with respect to heterogeneity in social preferences as a possible cause of this and conduct new experiments that allow for parsimonious identification of sellers’ social preference types. Our results confirm the assumed heterogeneity in social preferences and provide strong support for our explanation of the failure of verifiability to increase efficiency.

The impact of distributional preferences on (experimental) markets for expert services

Theory predicts that efficiency prevails on credence goods markets if customers are able to verify which quality they receive from an expert seller. In a series of experiments with endogenous prices we observe that verifiability fails to result in efficient provision behaviour and leads to very similar results as a setting without verifiability. Some sellers always provide appropriate treatment even if own money maximization calls for over- or undertreatment. Overall our endogenous-price-results suggests that both inequality aversion and a taste for efficiency play an important role for experts’ provision behaviour. We contrast the implications of those two motivations theoretically and discriminate between them empirically using a fixed-price design. We then classify experimental experts according to their provision behaviour.

Molecular evolutionary dynamics of Ross River virus and implications for vaccine efficacy

Ross River virus (RRV) is a mosquito-borne member of the genus Alphavirus that causes epidemic polyarthritis in humans, costing the Australian health system at least US$10 million annually. Recent progress in RRV vaccine development requires accurate assessment of RRV genetic diversity and evolution, particularly as they may affect the utility of future vaccination. In this study, we provide novel RRV genome sequences and investigate the evolutionary dynamics of RRV from time-structured E2 gene datasets. Our analysis indicates that, although RRV evolves at a similar rate to other alphaviruses (mean evolutionary rate of approx. 8x10(-4) nucleotide substitutions per site year(-1)), the relative genetic diversity of RRV has been continuously low through time, possibly as a result of purifying selection imposed by replication in a wide range of natural host and vector species. Together, these findings suggest that vaccination against RRV is unlikely to result in the rapid antigenic evolution that could compromise the future efficacy of current RRV vaccines.

Honesty in the provision of expert services: The effect of naturalistic framings and participants' professions

This thesis studies the incentives and behaviour of providers of expert services, like doctors, financial advisors and mechanics. The focus is in particular on provision of health care using a series of credence goods experiments conducted to investigate undertreatment, overtreatment and overcharging in a medical context. The findings of study one suggest that a medical framing compared to a neutral framing significantly increases pro-social behaviour for standard participants in economic experiments. Study two compares the behaviour of medical practitioners - mainly doctors - to students. It is observed that medical doctors’ undertreat and overcharge significantly less, but at the same time overtreat significantly more than students. The final study compares behaviours for other experts - accountants, engineers and lawyers - using experimental framings drawn from the respective contexts and students from the respective faculties as participants in credence goods experiments.

Traceability : retracing law and public policy on measurement standards

This presentation outlines key aspects of public policy in broad terms insofar as they relate to establishment, implementation and compliance with legal measurement standards. It refers in particular to traceability of a legal measurement unit from its source in a single international standard as a compliance issue. It comments on accreditation of legal measurement and liability concerned with errors in measurement.