TY  - RPRT
        AU  - Balafoutas, Loukas
AU  - Fornwagner, Helena
AU  - Kerschbamer, Rudolf
AU  - Sutter, Matthias
AU  - Tverdostup, Maryna
        TI  - Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets
        PY  - 2020/Nov/
        PB  - Institute of Labor Economics (IZA)
        CY  - Bonn
        T2  - IZA Discussion Paper
        IS  - 13848
        UR  - https://www.iza.org/index.php/publications/dp13848
        AB  - Credence goods markets – like for health care or repair services – with their informational asymmetries between sellers and customers are prone to fraudulent behavior of sellers and resulting market inefficiencies. We present the first model that considers both diagnostic uncertainty of sellers and the effects of insurance coverage of consumers in a unified framework. We test the model's predictions in a laboratory experiment. 
Both in theory and in the experiment diagnostic uncertainty decreases the rate of efficient service provision and leads to less trade. In theory, insurance also decreases the rate of efficient service provision, but at the same time it also increases the volume of trade, leading to an ambiguous net effect on welfare. In the experiment, the net effect of insurance coverage on efficiency turns out to be positive. We also uncover an important interaction effect: if consumers are insured, experts invest less in diagnostic precision. We discuss policy implications of our results.
        KW  - credence goods
KW  - diagnostic uncertainty
KW  - insurance coverage
KW  - welfare
KW  - model
KW  - experiment
        ER  -