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American Economic Review: Vol. 101 No. 2 (April 2011)

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The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition

Article Citation

Dulleck, Uwe, Rudolf Kerschbamer, and Matthias Sutter. 2011. "The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition." American Economic Review, 101(2): 526-55.

DOI: 10.1257/aer.101.2.526

Abstract

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)

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Authors

Dulleck, Uwe (Queensland U Technology)
Kerschbamer, Rudolf (U Innsbruck)
Sutter, Matthias (U Innsbruck and U Gothenburg)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
D82: Asymmetric and Private Information


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