Abstract
Credence goods markets suffer from inefficiencies caused by superior information of sellers about the surplus‐maximising quality. While standard theory predicts that equal mark‐up prices solve the credence goods problem if customers can verify the quality received, experimental evidence indicates the opposite. We identify a lack of robustness with respect to heterogeneity in social preferences as a possible cause of this and conduct new experiments that allow for parsimonious identification of sellers’ social preference types. Our results confirm the assumed heterogeneity in social preferences and provide strong support for our explanation of the failure of verifiability to increase efficiency.
Highlights
A central topic in the field of information economics is the design of institutions or contracts that mitigate market inefficiencies resulting from the presence of asymmetric information
We argue that future research should search for an institutional design that is robust against preference heterogeneity
The second assumption states that whether a seller is selfish, pro-social or anti-social depends only on whether the customer has more or less material payoff than the seller. This assumption is both permissive and restrictive, depending on the perspective taken. It is permissive because it allows for all major types of social preferences that have been discussed in the economics literature
Summary
A central topic in the field of information economics is the design of institutions or contracts that mitigate market inefficiencies resulting from the presence of asymmetric information. We study markets for credence goods where inefficiencies result from superior information of sellers about the optimal quality for consumers. In such markets, standard theory predicts that equal-mark-up prices solve the problem if customers can verify the quality received (Dulleck and Kerschbamer, 2006). Standard theory predicts that equal-mark-up prices solve the problem if customers can verify the quality received (Dulleck and Kerschbamer, 2006) This prediction is refuted by existing experimental evidence which indicates that markets with verifiability perform no better than markets without (Dulleck et al, 2011). We identify a lack of robustness of institutional design with respect to heterogeneity in social preferences as a possible cause. By social preferences we mean that subjects may care for their own material payoff, but may consider the payoffs of others as well, when making decisions
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