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
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Englisch
- Bibliographic citation
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Series: Diskussionsbeiträge ; No. 2014/29
- Classification
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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
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credence goods
information acquisition
moral hazard
subjective evaluation
- Event
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Geistige Schöpfung
- (who)
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Bester, Helmut
Dahm, Matthias
- Event
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Veröffentlichung
- (who)
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Freie Universität Berlin, Fachbereich Wirtschaftswissenschaft
- (where)
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Berlin
- (when)
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2014
- Handle
- Last update
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09.07.2022, 12:43 PM CEST
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
- Freie Universität Berlin, Fachbereich Wirtschaftswissenschaft
Time of origin
- 2014
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