Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets

Arbeitspapier

Credence goods markets – like for health care or repair services – with their informational asymmetries between sellers and customers are prone to fraudulent behavior of sellers and resulting market inefficiencies. We present the first model that considers both diagnostic uncertainty of sellers and the effects of insurance coverage of consumers in a unified framework. We test the model’s predictions in a laboratory experiment. Both in theory and in the experiment diagnostic uncertainty decreases the rate of efficient service provision and leads to less trade. In theory, insurance also decreases the rate of efficient service provision, but at the same time it also increases the volume of trade, leading to an ambiguous net effect on welfare. In the experiment, the net effect of insurance coverage on efficiency turns out to be positive. We also uncover an important interaction effect: if consumers are insured, experts invest less in diagnostic precision. We discuss policy implications of our results.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 8681

Classification and Topics

• Classification: Wirtschaft ; Design of Experiments: Laboratory, Individual ; Noncooperative Games ; Asymmetric and Private Information; Mechanism Design ; Insurance; Insurance Companies; Actuarial Studies
• Subject: credence goods ; diagnostic uncertainty ; insurance coverage ; welfare ; model ; experiment

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Balafoutas, Loukas ; Fornwagner, Helena ; Kerschbamer, Rudolf ; Sutter, Matthias ; Tverdostup, Maryna
• Event: Veröffentlichung
• (who): Center for Economic Studies and Ifo Institute (CESifo)
• (where): Munich
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/229499
• Last update: 13.11.2025, 11:44 AM CET