Credence goods, costly diagnosis, and subjective evaluation

Bester, Helmut; Dahm, Matthias

Abstract

We study contracting between a consumer and an expert in a credence goods model when (i) the expert's choice of diagnosis effort is not observable, (ii) the expert might misrepresent his private information about the adequate treatment, and (iii) payments can depend only on the consumer’s subjective evaluation of treatment success. We show that the first--best solution can always be implemented if the parties' discount factor is equal to one; a decrease in the discount factor makes obtaining the first--best more difficult. The first--best is also always implementable if separation of diagnosis and treatment is possible.

Citation

Bester, H., & Dahm, M. (2018). Credence goods, costly diagnosis, and subjective evaluation. Economic Journal, 128(611), 1367-1394. https://doi.org/10.1111/ecoj.12472

• Journal Article Type: Article
• Acceptance Date: Nov 14, 2016
• Online Publication Date: Jan 24, 2017
• Publication Date: Jun 30, 2018
• Deposit Date: Nov 25, 2016
• Publicly Available Date: Jan 25, 2019
• Journal: Economic Journal
• Print ISSN: 0013-0133
• Electronic ISSN: 1468-0297
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 128
• Issue: 611
• Pages: 1367-1394
• DOI: https://doi.org/10.1111/ecoj.12472
• Public URL: https://nottingham-repository.worktribe.com/output/943802
• Publisher URL: http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12472/full
• Additional Information: This is the peer reviewed version of the following article: Bester, H. and Dahm, M. (2017), Credence Goods, Costly Diagnosis and Subjective Evaluation. Econ J. doi:10.1111/ecoj.12472 which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12472/full This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.