Credence Good Research Articles

Uncovering Sophisticated Discrimination with the Help of Credence Goods Markups: Evidence from a Natural Field Experiment

Credence goods, such as repair and healthcare services, are characterized by profound information asymmetries between less-informed customers and better-informed expert sellers. These information asymmetries open the door for fraudulent behavior on the seller side. In a preregistered natural field experiment, we vary in one dimension the seller’s perception of whether the service is an ordinary or a credence good service and in the second dimension whether the customer is a member of a minority or a member of the majority. This allows us to measure the size of the induced credence goods markup and to address the question whether it interacts systematically with discrimination. We document the existence of a large credence goods markup, on average. Moreover, we find that members of the minority pay a sizeable discriminatory markup if the good is perceived as a credence good but not if it is perceived as an ordinary good. Our results show that sellers engage in sophisticated discrimination where informational asymmetries are used to hide discriminatory (fraudulent) behavior. With the help of an ex post survey, we derive a possible explanation for our results. This paper was accepted by Maria Claire Villeval, behavioral economics and decision analysis. Funding: Financial support was provided by the Austrian Science Fund [Special Research Area Grant SFB F63 and Grants P26901 and P27912]. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2022.02666 .

Algorithmic Advice as a Credence Good

Algorithmic Advice as a Credence Good

Seller Opportunism in Credence Good Markets -- the Role of Market Conditions

Seller Opportunism in Credence Good Markets -- the Role of Market Conditions

A performance‐based payment: Signaling the quality of a credence good

We consider credence goods. A typical example of a credence good is an expert service. Experts often offer rebates contingent on their client's failure or bonus payments contingent on their client's success. This paper provides a different rationale for performance‐based payments than reducing moral hazard. We show that a performance‐based payment can be a signal of the seller's ability. Due to different success rates across expert abilities, a high‐ability expert can commit to offering larger indemnity payments contingent on a client's failure or smaller bonus payments contingent on a client's success. Thus, high quality is signaled by performance‐based pricing.

Heterogeneity in expertise in a credence goods setting: evidence from audit partners

We examine the heterogeneity of experts in a credence goods setting. In our analytical model, clients are uncertain about how much effort experts need to provide to solve their problem, which is either simple or difficult. Experts have varying degrees of expertise. Less qualified experts are equally effective at solving simple problems but less effective at solving difficult ones. We show that clients pay a fee premium to more qualified experts, even for simple problems. This premium increases with the probability that the client has a difficult problem. We empirically test the model predictions in the context of partner industry expertise for the U.S. operations of the Big Four audit firms. We find, consistent with the model, a positive association between partner industry specialization and audit fees, even for simple audits, and a negative association between partner specialization and the client’s probability of restatements only for difficult audits. The industry specialization premium is higher in industries with higher proportions of difficult audits. Consistent with credence good agency issues, the specialization premium for simple audits is mitigated when information asymmetry between client and auditor is lower.

The information paradox in a monopolist’s credence goods market

Credence good markets, such as those for car repairs and medical treatments, are generally characterized by an ex-ante and ex-post information asymmetry between the uninformed customers and the informed expert. In this paper, we allow for both uninformed as well as informed customers to exist in a monopolist credence goods market. We analyze the implications of this kind of informational heterogeneity for the expert’s pricing decisions, incentives to commit fraud, as well as market efficiency and social welfare under different institutional arrangements. Most importantly, our approach enables us to evaluate endeavours to improve the level of customers’ information. Contrary to basic intuition, we find that recent developments and policy measures originally aimed at improving social welfare by increasing the level of information might actually backfire.

Public provisions of professional services

AbstractProfessional services are credence goods provided by certified experts (professionals). The most prominent examples of professional services are medical or legal services. Interestingly, the markets for such services are often subject to partial public provision: there is a low‐end segment, where the services of basic quality are provided for free and professionals are reimbursed by the government, and a high‐end segment, where free‐market principles prevail. We examine the efficiency of this market structure. To this end we apply a modified version of the model of the market for goods with credence attributes proposed by Baron. We demonstrate that partial public provision can correct for the market failure caused by the credence good nature of professional services, even in the presence of regulation costs. The efficiency gain from partial public provision is due to a combination of quality and price effects.

Was bedeuten die Vertrauensguteigenschaften der Jahresabschlussprüfung für die Regulierung der Wirtschaftsprüferhaftung?

AbstractThe annual audit is the auditors’ main activity. It includes risk analysis, planning and execution. Credence goods are special goods or services whose suppliers have superior information about the quality, e. g. therapies or repairs. The customer cannot evaluate whether the service was appropriate. As the audit is sophisticated and a professional act, it is reasonable to assume that the auditor is better informed. Hence the audit can be considered a credence good. This article discusses two questions: Does the audit comply with the characteristics of credence goods and can regulation – especially of the auditor’s liability – mitigate the audit market problems caused by this?

Market competition and demand for skills in a credence goods market: Evidence from face-to-face and web-based non-physician clinician training in rural China.

BackgroundNon-physician clinicians (NPCs) providing services in functionally private markets account for a large share of the workforce in the primary care system in many low-income and middle-income countries. Although regular in-service training is believed to be crucial to updating NPCs’ professional knowledge, skills, and practices, participation rates are often low. Low participation may result from the “credence good” nature of the market for primary care: if patients are unable to observe quality improvements from training, NPCs have weaker incentives to participate. Empirical evidence is limited on the relationship between market competition and NPC participation in-service training as well as how participation varies with the type of training available.MethodsThe study uses a dataset of 301 NPCs from three prefectures in Yunnan, a province in southwest China, collected in July 2017. Logistic regression is used to estimate the relationship between competition and NPC’s participation in in-service training. We assess the relationship between participation and both the quantity of competition (number of competitors in the same village and surrounding villages) and the quality of competition (proxied using characteristics of competing clinicians).ResultsIn 2016, nearly two thirds of NPCs participated in face-to-face or web-based in-service trainings at least once. Specifically, 58 percent of NPCs participated in face-to-face in-service trainings, and 24 percent of NPCs participated in web-based in-service trainings. The quantity of competitors is unrelated to participation in in-service training. The quality of competition is not related to face-to-face training but has a significant positive relationship with participation in web-based training.ConclusionsWeb-based trainings may be a better approach to increase NPC skills in developing country primary care markets.

Understanding the Runaway Tuition Phenomenon: Credence Goods in an Age of Skepticism

Seeking to explain why college tuitions are so rapidly increasing, and finding nothing compelling in the usually-offered stories, the author stumbles upon the answer in plain sight. Because of the kind of product higher education is (a credence good) sellers must go to heroic lengths to keep up the semblance that the product is worth all that is charged for it. Money and resources of other kinds must be directed to this end to the limit of their availability, which can never be satiated no matter how much is spent. The economist Howard Bowen seems to have had the basic insight in 1980. The present paper, however, argues that the driving force behind the phenomenon isn’t competition but rather a rational fear, that even a monopolist might have, that the public will stop believing in the worthiness of the product.

Decision of Suppliers and Consumers of Credence Good in Quality Food Markets

Most food products can be classified as “credence” goods and regulations exist to provide consumers with a substitute for the lacking information and trust. The paper presents an analysis of the decisions of suppliers and consumers about “credence” good in three institutional scenarios, which reflect different levels of credibility of the regulation. The first scenario is a reference scenario in which the regulation is fully credible. In the second case considered there is no regulation, or, if there is, it is totally ineffective. In the third scenario a regulation only partially credible provides consumers with an imperfect substitute for the information and trust they lack. The last section of the paper discusses the possible implications of the results reached in explaining the limited effectiveness of many regulations concerning food quality.

Lending credence: motivation, trust, and organic certification

The information asymmetries inherent in credence goods have typically led economists to conclude these markets require well-defined quality standards and third-party verification that producers are meeting those standards. Nonetheless, many producers of credence goods appear to be opting out of certification. Why? This paper builds in previous research and develops a theoretical framework to think about how producers’ motivation and relationships with consumers affect the necessity and effectiveness of certification. I find the degree to which a consumer trusts the producer of a credence good and the certification standard that governs it and the degree to which the producer is motivated to produce a good of a certain quality both have important effects on certification-based regulation.

Taxi apps, regulation, and the market for taxi journeys

This paper attempts to provide a starting point for discussion on how smartphone-based taxi applications (‘apps’) have changed the market for taxi journeys and the resulting implications for taxi market regulation. The paper focuses on the taxi apps and their impact on taxi markets. It provides a brief history of taxi regulation before outlining the underlying economic rationales of its current form in many parts of the world, characterised as the “QQE” framework (quantity, quality and economic controls on operators). It argues that current regulation assumes that taxi markets are subject to three sets of problems that require correction by regulatory intervention, namely: those associated with credence goods, problems related to open access and those resulting from transactions occurring in a thin market. It is then proposed that taxi apps solve both the credence good and thin market problems whilst largely mitigating the problems associated with open access. The paper then presents some potential problems for taxi apps, namely the potential for instability on supply and demand sides, collusion and monopoly. It also discusses concerns about driver background checks and safety. The paper concludes by arguing that instead of restricting the growth of the taxi market, regulators should focus on reducing the likelihood of monopoly and collusion in a taxi market led by apps.

The economics of professional services: lemon markets, credence goods, and C2C information sharing

We discuss how professional service markets are plagued by asymmetric information, by looking jointly at the literature stemming from the seminal work of Akerlof on the “market of lemons”, and at the definition of “credence good” which has been developed especially within the field of health economics. Since consumers cannot evaluate ex post the quality of purchased professional services when these are “credence goods”, they cannot rely with 100 % confidence on other consumers’ and experts’ signals about service providers’ quality. Hence, questions arise on the effectiveness of traditional market features highlighted in literature as market-enhancing when information asymmetry is an issue, namely: advertising, certification, reputation, and liability. Our analysis specifically focuses on consumer-provided knowledge by looking at recent development of Web-based rating and reviewing services. Results point to the fact that consumers in the U.S. heavily rely on such services, and they do so roughly in proportion to their consumption of each professional sector. Therefore, future research on professional services should include a “C2C search technology” when modeling consumer behaviors that allows to define how much each professional service is to be considered as pure or hybrid “credence good.”

Pricing for a credence good: an exploratory analysis

PurposeThis paper aims to explore the role of observable product characteristics and label wording in consumers' valuations for credence goods, products for which key characteristics may not be fully evaluated even after purchase. The objective is to draw conclusions with relevance to pricing policy.Design/methodology/approachHedonic price equations are estimated for a dietary supplement called black cohosh, taken by women for relief from menopausal symptoms.FindingsConsumers respond in expected ways to label words that directly indicate product characteristics: for example, paying more for a product labeled as suitable for vegetarians. But surprising results occur for some nonspecific label words (e.g. “guaranteed” is associated with lower prices), suggesting that consumers view these words as indirect signals with respect to unobservable qualities. Additionally, consumers pay more for packages containing more units (e.g. tablets) even when the time supply of product is held constant; this outcome is consistent with the notion that sheer quantity reassures consumers about value and could indicate a reaction to uncertainty in the overall value proposition.Research limitations/implicationsThe study relies on list prices in place of transacted prices, so consumers' true valuations may not be reflected with complete accuracy. The study should be repeated in the future using scanner data on actual product transactions.Practical implicationsThe indirect signals transmitted by label words and other observable attributes play a key role in consumers' valuations for credence goods, and so are highly relevant to pricing strategy.Originality/valuePrevious studies have considered willingness‐to‐pay for label‐indicated credence qualities, but have not looked at the role of indirect signals/indicators.

Credence Good Labeling: The Efficiency and Distributional Implications of Several Policy Approaches

AbstractA model of vertical product differentiation is used to analyze the labeling of credence goods, focusing on the manner by which quality is communicated. The results indicate that firms prefer private labeling options. In addition, firms may hire private certifiers as well as paying for mandated government labels when the government's quality benchmark substantially deviates from firms' private quality choices. The average consumer prefers a mandatory, discrete label with a high‐quality standard while poor consumers prefer a mandatory, discrete label with a low standard.

Occupational Licensing of a Credence Good: The Regulation of Midwifery

1. Introduction Occupational licensing as old as trade. Estimates are that in United States alone, at least 800 occupations require some form of license to (Rottenberg 1980, p. 2). Midwifery most certainly among oldest occupations known to Homo sapiens, and, unsurprisingly, it has been subject of licensing regulations over 20th century. There has been, however, a marked reemergence of practice over past 20 years in United States. After nearly being driven from existence by physicians in early part of 20th century, percentage of midwife attended births has risen from 0.9% of all births in 1975 to 5.95% of all births in 1995. This latter figure translates into 231,921 midwife-attended births for year 1995. Of this figure, CNMs attended 94.3%, or 218,613, births. A number of factors account for this resurgence, including women's expression of their right to choose birth practitioners and place of birth, increased political expression of that right, and escalating costs of traditional childbirth services by obstetricians (OBs) and hospitals (Butter and Kay 1988). In contrast, midwife-attended births account for a full 75% of all births in Europe, with far lower infant and maternal mortality rates reported (Coburn 1997). Midwives are classified into two basic categories in this country: lay midwife and certified nurse-- midwife (CNM). Lay midwives typically receive no formal educational training but are clinically trained through apprenticeships. On other hand, a CNM is a registered nurse with advanced training in midwifery who possesses evidence of certification by American College of Nurse-- Midwives (ACNM) (Adams 1989, p. 1038). The practice of nurse-midwifery, as defined by ACNM, the independent management of care of essentially normal newborns and women, antepartally (before birth), intrapartally (during birth), postpartally (after birth) and/or gynecologically ... within a health care system which provides for medical consultation, collaborative management, and referral (Safriet 1992, p. 425). The causes and effects of state regulation that determines extent of professional independence from physicians of advanced practice nurses (APNs) has been analyzed by Dueker et al. (2000) for same general period we employ. Advanced practice nursing, however, includes nurse practitioners, clinical nurse specialists, and nurse anesthetists as well as CNMs. Dueker et al. (2000) suggest that, for this larger category of nurse specialists, APN earnings are lower and physicians assistants earnings are higher in states where APNs have attained higher levels of professional independence (measured in part by prescriptive authority).1 Midwifery has been included, along with other heath care professions, in interesting studies of impact of composition of public licensing boards on particular occupational requirements (Graddy and Nichol 1989; Graddy 1991), but (to best of our knowledge) midwifery has not been isolated in any study of effects of regulation(s).2 The purpose of this paper thus to analyze empirically economic impact of alternative forms of regulation within state markets for midwife services. Certified nurse-midwives are formally recognized by American College of Obstetricians and Gynecologists (ACOG) and are now able to practice legally in all 50 states including District of Columbia, but CNMs practice under significant and significantly different regulations that limit their scope of practice and constrain their use by women (DeVries 1985) within 50 states. There are suggestions in literature that severity of regulations at state level-a partial product of past pressure by medical establishment (OBs in particular--has had deleterious effects in market for midwives' services. However, there has been (again to best of our knowledge) no empirical support for such propositions or an analysis of particular impact of alternative regulations. …

Occupational Licensing of a Credence Good: The Regulation of Midwifery

A general theoretical and empirical model of the impact of regulation on supply and demand (prices and quantities) is developed in this paper. The regulation of midwifery services—of certified nurse‐tnidwives (CNMs)—relative to obstetricians (OBs) is analyzed within this framework. Demand‐side (quality assurance) effects are distinguished from supply‐side (Stigler‐Peltzman) effects in the model. Since both unambiguously predict a price increase, we focus on the regulatory impact on quantity. We find, within the empirical model, that while both effects are present, supply‐restricting effects dominate quality assurance in the U.S. market for CNM services. When mean regulations are compared to minimum regulations in the sample, CNM births increase from just under 6% of all births to a little over 11%. On net, regulation reduces the quantity of CNM births.

On Doctors, Mechanics and Computer Specialists or Where are the Problems with Credence Goods

With credence goods consumers cannot judge the quality they receive compared to the quality they need. The needed quality can only be observed by an expert seller who may exploit the information asymmetry by cheating. In recent years various contributions have analyzed the credence goods problem under a wide variety of assumptions yielding equilibria exhibiting various degrees of inefficiencies and fraud. The variety of results has fostered the impression that the equilibrium behavior of experts and consumers in the credence goods market sensitively depends on the details of the models. More disturbingly, apparently similar models often lead to contradicting results. The present paper shows that the results for the majority of the specific models can be reproduced in a very simple unifying framework. Our model is constructed so that an efficient solution is reached if a small number of critical assumptions is satisfied, and virtually all existing results on inefficiencies in the credence good market are obtained by relaxing one of these conditions. Thus, our simple unifying model not only permits a clearer discrimination between situations in which market institutions solve the fraudulent expert problem without any cost and those where they do not; it also helps to identify the forces driving the various inefficiency results in the literature. Existing results are generalized, some previous interpretations of the forces leading to the striking differences in outcomes are questioned, and a new source for inefficiencies is identified.

Credence goods monopolists

With a credence good consumers never discover how much of the good they actually need. Therefore, the seller acts as the expert determining the customers’ requirements. This information asymmetry creates strong incentives for the seller to cheat on services. We analyze whether the market mechanism may induce non-fraudulent seller behavior. We consider four scenarios differing in the amount of information consumers have at hand to infer the seller’s incentives to be honest. In three constellations the profit maximizing credence goods monopolist provides honest services; only in one scenario there is no trade.