The Role of Diagnostic Ability in Markets for Expert Services

In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. Experts may exploit their informational advantage by defrauding customers. Market institutions have been shown theoretically to be effective in mitigating fraudulent expert behavior. The paper presented in this ZEW Research Seminar analyzes whether this positive result carries over when experts are heterogeneous in their diagnostic abilities. It finds that efficient market outcomes are always possible. However, inefficient equilibria can also exist. When such inefficient equilibria are played, a larger share of high-ability experts can lead to more inefficiencies relative to the efficient equilibria.