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Cover of: Expert Costs and the Role of Verifiability
Jianpei Li, Yaofu Ouyang, Wanzhu Zhang

Expert Costs and the Role of Verifiability

Section: Articles
Volume 180 (2024) / Issue 1, pp. 17-42 (26)
Published 02.06.2023
DOI 10.1628/jite-2023-0029
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  • 10.1628/jite-2023-0029
We analyze a credence goods market where the expert may have a high or low cost in repairing a major problem, assuming that (i) the expert is liable for the outcome of the treatment (liability), and (ii) the type of treatment is verifiable by the consumer (verifiability). With just liability, an inefficiency arises because not all major problems are resolved in equilibrium. With both verifiability and liability, another inefficiency arises because minor problems are sometimes fixed through costly major treatments (overtreatment). Adding verifiability improves social welfare because a major problem is resolved with a higher probability despite the overtreatment costs.