Credence goods, incentives and behavior

In many important markets e.g., markets for health care, repair and legal services, as well as markets for financial advice and fund management consumers are unable, even ex post, to identify the type or quality of a good, service or asset that fits their needs best. Doctors, mechanics and legal or financial experts are typically better informed regarding the actual or appropriate quality of service. As this information asymmetry between trading partners often persists, such goods and services are referred to as credence goods. Problematically, this information asymmetry can create fraud, inefficiencies and major market distortions see the last financial crisis as an example. Therefore investigating credence goods markets in economics and in finance is of utmost importance for customers, politicians, regulators and the society as a whole. The aim of our research project Credence goods, incentives, and behavior Theory, lab, and field is to analyze key determinants of individual behavior and market performance in credence goods markets and derive policy conclusions from our analysis. We will study (1) how different monetary and non-monetary incentives affect fraud, risk-taking, and efficiency; (2) how the possibility of diagnosis errors influences provision behavior; (3) how different insurance schemes affect behavior and market efficiency; (4) how personal, moral and cognitive characteristics, norms, and peer-effects influence behavior and market outcomes; and (5) how information provision interacts with reputational concerns of competing credence goods providers. From a methodological perspective, our project creates synergies by combining theoretical modelling with laboratory and field experiments. We will, for instance, run laboratory experiments with financial professionals investigating how their risk-taking changes when they know that excessive risk-taking can harm third parties. We will, as a second example, run a field experiment with taxi drivers in order to investigate how different personality traits and economic preferences are related to the provision behavior of taxi rides, thus opening the black box of what type of sellers cheat on customers. As a third example, we will conduct a large-scale laboratory experiment in which we will test the theoretical predictions of how reputational concerns and different institutional designs on credence goods markets affect honest provision behavior of sellers and market efficiency. With our project we contribute in several novel ways. First, the project delivers fundamental research that enhances our understanding of credence goods markets and how individual behavior, incentive schemes and the institutional framework interact on these markets. Second, the project results are expected to provide policy advice on how to design institutions that help to reduce fraud on credence goods markets. Several of our team members are frequently communicating with the media or with politicians. This will contribute to a strong dissemination of basic research into societies. Third, focusing on the interaction between incentives and credence goods provision opens a completely new perspective on markets for financial advice and fund management where expert incentives and market performance have been under scrutiny particularly since the last financial crisis.