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Efficient Liability in Expert Markets
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Efficient Liability in Expert Markets

Author

Listed:
  • Chen, Yongmin
  • Li, Jianpei
  • Zhang, Jin

Abstract

When providing professional services, an expert may misbehave by either prescribing the "wrong" treatment for a consumer's problem or failing to exert proper effort to diagnose it. We show that under a range of liabilities the expert will recommend the appropriate treatment based on his private information if price margins for alternative treatments are close enough; however, a well-designed liability rule is essential for also motivating efficient diagnosis effort. We further demonstrate that unfettered price competition between experts may undermine the efficient role of liability, whereas either a minimum-price constraint or an obligation-to-serve requirement can restore it.

Suggested Citation

  • Chen, Yongmin & Li, Jianpei & Zhang, Jin, 2017. "Efficient Liability in Expert Markets," MPRA Paper 104090, University Library of Munich, Germany, revised 06 Nov 2020.
    • Handle: RePEc:pra:mprapa:104090
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Balafoutas, Loukas & Fornwagner, Helena & Kerschbamer, Rudolf & Sutter, Matthias & Tverdostup, Maryna, 2020. "Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets," IZA Discussion Papers 13848, Institute of Labor Economics (IZA).
    2. Jost, Peter-J. & Reik, Steffen & Ressi, Anna, 2021. "The information paradox in a monopolist’s credence goods market," International Journal of Industrial Organization, Elsevier, vol. 75(C).
    3. David Bardey & Denis Gromb & David Martimort & Jérôme Pouyet, 2020. "Controlling Sellers Who Provide Advice: Regulation and Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 68(3), pages 409-444, September.
    4. Jordan Bernhardt & Lauren Sukin, 2021. "Joint Military Exercises and Crisis Dynamics on the Korean Peninsula," Journal of Conflict Resolution, Peace Science Society (International), vol. 65(5), pages 855-888, May.
    5. Cao, Yiran & Chen, Yongmin & Ding, Yucheng & Zhang, Tianle, 2022. "Search and competition in expert markets," MPRA Paper 114170, University Library of Munich, Germany.
    6. Liu, Ting & Ma, Ching-to Albert, 2024. "Equilibrium information in credence goods," Games and Economic Behavior, Elsevier, vol. 145(C), pages 84-101.

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    More about this item

    Keywords

    Credence goods; experience goods; experts; liability; diagnosis effort; undertreatment; overtreatment;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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