On The Efficiency Of Credence Goods Market

When consumers buy some products or services,consumers themselves do not know what they really need,but rather the expert who is also the seller knows some related information.Such goods or services are called credence goods.Typical credence goods include medical service,education,car repair,and legal and financial consulting services.The expert,who is the seller of the service,might misrepresent his superior information in order to exploit the consumer.Due to the expert's opportunistic behavior,three types of inefficiencies can arise: 1),undertreatment arises when the expert provides an insufficient low-cost treatment which does not solve the consumer's problem;2),overtreatment arises when the expert provides an unnecessary high-cost treatment as a low-cost treatment would have been sufficient;3),overcharging arises when the expert charges the price of a service he did not perform.Ample evidence shows these three inefficiencies are prominent in credence goods market and cause hug social cost.Essentially,the expert's behaviors are a outcome of gaming between the expert and the consumer under certain market condition.Thus,the literature studies credence goods problem in the viewpoints of consumer's characteristics,expert's characteristics and market institutions.But there are still some interesting points to be well studied: first,the literature does not consider the implication of risk-aversion of consumers on experts' prescription behaviors,which is realistic and important as consumers of credence goods such as health care are generally risk-averse and consumer's risk aversion can to large extent affects his purchasing decision.Second,most of related studies does not consider that the expert's diagnostic information can be inaccurate and the expert can invest in improving the accuracy of his diagnostic information.In fact,in some cases misdiagnosing are inevitable,especially in medical service.Third,in terms of market institution,most papers assume that either the expert is liable for solving consumers' problem(Liability),or the type of treatment provided by the expert is verifiable(Verifiability),or both.However,the situations in which both these two institutions are not likely to hold is not rare.In medical service,for instance,doctors are not liable for resolving patients' diseases,and patients might also be not able to verify the type of treatment performed by doctors.Therefore,focusing on these three points of inadequacy in the literature,this dissertation studies the efficiency of credence goods market for better understanding the performance of this market and discussing possible ways for improving its efficiency,which has important theoretical value and policy implications for the current health care market reform in China.Chapter 3 analyses how the consumer's risk-aversion affects the expert's behaviour in a credence goods market when he is not committed to accepting the expert's prescriptions.We show that without the consumer's commitment there still exists a continuum of equilibria where the expert overtreats the consumer the consumer with strictly positive probability.And the expert's probability of overtreamtent increases in the degree of the consumer's risk aversion.Meanwhile,the expert's overtreating behaviors will deter the consumer from purchase any insurance which could possibly increase its welfare,because purchasing insurance will increase the expert's probability of overtreatment.Chapter 4 studies the incentive of an expert to invest in his diagnostic skill for improving the accuracy of diagnostic information within a competitive credence good market.We highlight three findings: first,when the expert's diagnostic information is inaccurate,both overtreatment and undertreatment are unavoidable,but increase the expert's investment can alleviate both problems.Second,compared with the social optimal,the market equilibrium might involve either too many experts with under-investment in diagnostic skill,or too few experts with over-investment,depending on the convexity of the investment cost function.Third,we also find that price control is not good tool for improving efficiency,rather it could even cause more distortions and thus induce more inefficiencies.Chapter 5 analyzes the optimal contract for a consumer to procure a credence good from an expert when(i)the expert might misrepresent his private information about the consumer's need,(ii)the expert might not choose the requested service since his choice of treatment is non-observable,and(iii)limited liability of the expert precludes imposing penalty payments on him.We characterize payments under the optimal contract and show that,compared with the first-best,these induce inefficient undertreatment.The consumer relies too often on the low cost treatment or on the expert's diagnostic information.We further show that separating diagnosis and treatment increases consumer surplus.Whether it decreases or increases the likelihood of undertreatment,however,depends on the accuracy of the expert's information.Chapter 6 applies our theoretical analysis to the food safety problem and health care market in China.First,Chapter 3 theoretically shows that more risk-averse consumers should watch out overtreatment more carefully.And in terms of the New Rural Cooperative Medical System,the government should implement more restrictive monitoring and auditing institution,to prevent doctors from overtreating as with insurance increases doctors incentive for overtreating.Second,according to the results in Chapter 4 there two important reason causing the serious overtreamtent problem in Chinese health care market: 1)Doctors as the providers of health care services invest too less in diagnostic skill,resulting in low diagnostic capability,and therefore cannot accurately diagnose patient's problem and make proper prescriptions;2)The cost of misdiagnosing in China is huge,and thus doctors are prone to make "big" prescriptions to avoid such risks.Last,our contracting model in Chapter 5 fits well with the current food safety problem in China,and theoretically proves that undertreatment and overcharging are more likely to occur in Chinese food safety market.Meanwhile,our analysis on separation of diagnosis and treatment shows that to protect the consumer's welfare,government should set up independent third-party monitoring,verifying and consulting institutions,acting as an reliable source providing information about food safety,and therefore mitigate the incentive problem of the producer and seller of food.But this policy does not necessarily decrease the food safety problems,rather it might even make the problem worse in some cases.Last,Chapter 7 concludes,and discusses the limitations of this dissertation and future promising research directions.