The Econophysics Blog

This blog is dedicated to exploring the application of quantiative tools from mathematics, physics, and other natural sciences to issues in finance, economics, and the social sciences. The focus of this blog will be on tools, methodology, and logic. This blog will also occasionally delve into philosophical issues surrounding quantitative finance and quantitative social science.

Tuesday, April 18, 2006

Forensic Economics of 'Credence Goods'

I just read a fascinating article in The Economist titled: Sawbones, cowboys and cheats: Is your doctor, mechanic or taxi-driver cheating you? Economics can help. The article discusses two research papers by economists examining the problem of 'credence goods.' Economists define 'credence goods' to be goods and services (actually, it is usually more about service than goods, so it really should be called 'credence services') where there is a major asymmetric information problem between the consumer and the supplier. For example, how does a layman know if a doctor has done too much (or too little) of some medical procedure?

According to the article, a Swiss economist found that physicians tended to perform less unnecessary procedures on other doctors and relatives of lawyers. Why? Because those classes of patients either had less of an asymmetric information problem or the supplier had strong incentives to not cheat their customers.

The Economist article also mentioned a research paper -- titled, On Doctors, Mechanics and Computer Specialists - The Economics of Credence Goods -- that found that, if consumers were cognizant of the 'credence goods' problem and took actions to remedy the situation, the market would re-align the incentives enough to substantially reduce the problem. The ideal situation (the equilibrium price if the theory pans out) would be where the suppliers of credence goods would charge a flat fee ... raise the prices of simpler services and lower the price of more complicated services.

By the way, I wrote a blog piece on the forensic economics of sports betting a while back that was in a similar spirit to this post.

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