Arbeitspapier
Credence goods, costly diagnosis, and subjective evaluation
We study contracting between a consumer and an expert. The expert can invest in diagnosis to obtain a noisy signal about whether a low-cost service is sufficient or whether a high-cost treatment is required to solve the consumer's problem. This involves moral hazard because diagnosis effort and signals are not observable. Treatments are contractible, but success or failure of the low-cost treatment is observed only by the consumer. Payments can therefore not depend on the objective outcome but only the consumer's report, or subjective evaluation. A failure of the low-cost treatment delays the solution of the consumer's problem by the high-cost treatment to a second period. We show that the first-best solution can always be implemented if the parties' discount rate is zero; an increase in the discount rate reduces the range of parameter combinations for which the first-best can be obtained. In an extension we show that the first-best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents.
- Language
-
Englisch
- Bibliographic citation
-
Series: SFB/TR 15 Discussion Paper ; No. 483
- Classification
-
Wirtschaft
Asymmetric and Private Information; Mechanism Design
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Economics of Contract: Theory
Analysis of Health Care Markets
- Subject
-
credence goods
information acquisition
moral hazard
subjective evaluation
- Event
-
Geistige Schöpfung
- (who)
-
Bester, Helmut
Dahm, Matthias
- Event
-
Veröffentlichung
- (who)
-
Sonderforschungsbereich/Transregio 15 - Governance and the Efficiency of Economic Systems (GESY)
- (where)
-
München
- (when)
-
2014
- DOI
-
doi:10.5282/ubm/epub.21900
- Handle
- URN
-
urn:nbn:de:bvb:19-epub-21900-7
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Bester, Helmut
- Dahm, Matthias
- Sonderforschungsbereich/Transregio 15 - Governance and the Efficiency of Economic Systems (GESY)
Time of origin
- 2014
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