Credence goods, costly diagnosis, and subjective evaluation

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Diskussionsbeiträge ; No. 2014/29

Classification and Topics

• 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

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bester, Helmut ; Dahm, Matthias
• Event: Veröffentlichung
• (who): Freie Universität Berlin, Fachbereich Wirtschaftswissenschaft
• (where): Berlin
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/103887
• Last update: 10.03.2025, 11:43 AM CET