Insurance coverage of customers induces dishonesty of sellers in markets for credence goods

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• Neururer, Daniel
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• Sutter, Matthias

Abstract

Markets for credence goods are characterized by informational asymmetries between sellers and customers, creating strong incentives for fraudulent seller behavior. Prime examples for credence goods are repair services or medical treatments. Empirical evidence suggests that sellers' fraud imposes an excess burden of billions of dollars annually to customers. We examine in a natural field experiment how customers' insurance coverage exacerbates inefficiencies in the provision of credence goods. Specifically, we study how computer repair shops exploit customers' insurance. In a control treatment, the average repair price is about EUR 70, but increases by 80% when the customer has insurance for repair costs. We can show that the latter increase is mainly due to overprovision of parts and fraudulent overcharging of working time.