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Edited by Jose A. Scheinkman, Columbia University, New York, NY, and approved May 17, 2016 (received for review September 9, 2015)
Significance
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.
Abstract
Honesty is a fundamental pillar for cooperation in human societies and thus for their economic welfare. However, humans do not always act in an honest way. Here, we examine how insurance coverage affects the degree of honesty in credence goods markets. Such markets are plagued by strong incentives for fraudulent behavior of sellers, resulting in estimated annual costs of billions of dollars to customers and the society as a whole. Prime examples of credence goods are all kinds of repair services, the provision of medical treatments, the sale of software programs, and the provision of taxi rides in unfamiliar cities. We examine in a natural field experiment how computer repair shops take advantage of customers’ insurance for repair costs. In a control treatment, the average repair price is about EUR 70, whereas the repair bill increases by more than 80% when the service provider is informed that an insurance would reimburse the bill. Our design allows decomposing the sources of this economically impressive difference, showing that it is mainly due to the overprovision of parts and overcharging of working time. A survey among repair shops shows that the higher bills are mainly ascribed to insured customers being less likely to be concerned about minimizing costs because a third party (the insurer) pays the bill. Overall, our results strongly suggest that insurance coverage greatly increases the extent of dishonesty in important sectors of the economy with potentially huge costs to customers and whole economies.
Footnotes
- ↵1To whom correspondence should be addressed. Email: matthias.sutter{at}wiso.uni-koeln.de.
Author contributions: R.K., D.N., and M.S. designed research, performed research, analyzed data, and wrote the paper.
The authors declare no conflict of interest.
This article is a PNAS Direct Submission.
This article contains supporting information online at www.pnas.org/lookup/suppl/doi:10.1073/pnas.1518015113/-/DCSupplemental.
Freely available online through the PNAS open access option.
- aDepartment of Economics, University of Innsbruck, A-6020 Innsbruck, Austria;
- bDepartment of Economics, University of Cologne, D-50923 Cologne, Germany
Edited by Jose A. Scheinkman, Columbia University, New York, NY, and approved May 17, 2016 (received for review September 9, 2015)
Significance
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.
Abstract
Honesty is a fundamental pillar for cooperation in human societies and thus for their economic welfare. However, humans do not always act in an honest way. Here, we examine how insurance coverage affects the degree of honesty in credence goods markets. Such markets are plagued by strong incentives for fraudulent behavior of sellers, resulting in estimated annual costs of billions of dollars to customers and the society as a whole. Prime examples of credence goods are all kinds of repair services, the provision of medical treatments, the sale of software programs, and the provision of taxi rides in unfamiliar cities. We examine in a natural field experiment how computer repair shops take advantage of customers’ insurance for repair costs. In a control treatment, the average repair price is about EUR 70, whereas the repair bill increases by more than 80% when the service provider is informed that an insurance would reimburse the bill. Our design allows decomposing the sources of this economically impressive difference, showing that it is mainly due to the overprovision of parts and overcharging of working time. A survey among repair shops shows that the higher bills are mainly ascribed to insured customers being less likely to be concerned about minimizing costs because a third party (the insurer) pays the bill. Overall, our results strongly suggest that insurance coverage greatly increases the extent of dishonesty in important sectors of the economy with potentially huge costs to customers and whole economies.
- credence goods
- field experiment
- insurance coverage
- fraud
- deception
Footnotes
- ↵1To whom correspondence should be addressed. Email: matthias.sutter{at}wiso.uni-koeln.de.
Author contributions: R.K., D.N., and M.S. designed research, performed research, analyzed data, and wrote the paper.
The authors declare no conflict of interest.
This article is a PNAS Direct Submission.
This article contains supporting information online at www.pnas.org/lookup/suppl/doi:10.1073/pnas.1518015113/-/DCSupplemental.
Freely available online through the PNAS open access option.
Insurance coverage and fraud in credence goods
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