Expert’s reputation concern and consumer information

Abstract

Serious information asymmetry exists between consumers and expert sellers in the credit-goods market. This study develops a generic model to investigate the relationship between consumer information and expert fraud in the credence goods market. The unique features of the model are that (i) the state of the consumer is multidimensional, (ii) the expert seller has concerns about their reputation, and (iii) information asymmetry exists between the consumer and the expert seller regarding the necessity of the provided treatment ex-ante and ex-post. On average, the equilibrium amount of the recommended treatment is greater than the necessary level. The contingent effect of any consumer information on expert overtreatment can be evaluated by analyzing the posterior variance of the number of problems updated by the information. Consumer information on only part of the problem hardly reduces expert overtreatment in certain situations. The unconditional effect of consumer information on expert seller fraud varies considerably with state distribution.