The economics of credence goods - A survey of recent lab and field experiments

Abstract

Many important markets, such as those for health care or repair services, are characterized by pronounced informational asymmetries between buyers and sellers - because the buyer cannot identify the quality of the product that fits her needs best, while the seller can do so by performing a diagnosis. The seller can then recommend the appropriate or an inappropriate quality. Since the buyer has no means to verify the correctness of the recommendation but has to rely on the honesty of the seller, such goods are called credence goods. Markets for credence goods are typically plagued by incentives for fraudulent behavior and by inefficiencies caused by actual or expected fraud, covering overprovision and overcharging. Although highly policy relevant, a carefully controlled analysis of the provision of credence goods through the use of experiments has only recently taken off. Here, we provide an overview about recent laboratory and field experiments on the economics of credence goods and discuss important implications and directions for future research.