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Credence Goods, Costly Diagnosis and Subjective Evaluation

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journal contribution
posted on 2019-08-29, 13:11 authored by Helmut Bester, Matthias Dahm
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.

Funding

Helmut Bester acknowledges support by the German Science Foundation (DFG) through SFB/TR 15 and by the Berlin Centre for Consumer Policies (BCCP). Matthias Dahm acknowledges the support of the Government of Spain under project ECO2010-19733.

History

Citation

The Economic Journal, 2018, 128 (611), pp. 1367-1394

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Business

Version

  • AM (Accepted Manuscript)

Published in

The Economic Journal

Publisher

Oxford University Press (OUP), Royal Economic Society

issn

0013-0133

Acceptance date

2016-11-14

Copyright date

2017

Available date

2019-08-29

Publisher version

https://academic.oup.com/ej/article/128/611/1367/5088350

Language

en

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