The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition

Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as underand overtreatment or market break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only a minor effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated. * We received helpful comments from Dennis Dittrich, Winand Emons, Stephan Kroll, Wolfgang Luhan, and participants at the Econometric Society Meeting in Wellington, the ENABLE-Meeting in Mannheim, the 3 Australian Workshop on Experimental Economics in Melbourne, and seminar participants at University of Bonn, IZA Bonn, University of Hannover, University of Stavanger, University of Vienna, Max Planck Institute of Economics Jena, and Queensland University of Technology. Financial support from the Max Planck Society, the German Science Foundation (through the Gottfried Wilhelm Leibniz Price of the DFG, awarded to Axel Ockenfels) and the Austrian Science Foundation (FWF-grant P20796) is gratefully acknowledged. # Corresponding author’s address: University of Innsbruck, Department of Public Finance, Universitaetsstrasse 15, A-6020 Innsbruck, Austria. e-mail: [email protected]