Wednesday, August 13, 2014
Olivier Bonroy (Universite Pierre-Mendes-France - Grenoble II), Stephane Lemarie (Universite Pierre-Mendes-France - Grenoble II), Jean-Philippe Tropeano (Paris School of Economics) discuss Credence goods, experts and risk aversion.
ABSTRACT: The existing literature on credence goods and expert services has overlooked the importance of risk aversion. In this paper we extend a standard expert model of credence goods with verifiable service quality by considering risk-averse consumers. Our results show that the presence of risk aversion reduces the expert's incentive to invest in diagnosis and may thus lead to consumers' mistreatment.