Consumer information in a market for expert services: Experimental evidence

Abstract In markets for expert services, consumers suffer from a problem and rely on diagnosis and treatment by better informed experts. Consumers anticipate that experts might engage in fraudulent behavior and abstain from entering the market. We experimentally investigate whether improved consumer knowledge alleviates such market inefficiencies. Consumers receive an informative, noisy signal about their problem severity. Liable experts diagnose and offer a verifiable treatment. We show that consumers are reluctant to accept expensive treatments, where rates further decrease with good, but substantially increase with bad signals. Experts condition fraud on a consumer’s risk of suffering from a serious problem if they can observe consumer information. Accordingly, experts and low-risk consumers benefit at the expense of more frequently cheated high-risk consumers. Overall, consumer information leads to more (appropriate) treatments and thus increased welfare. In contrast to our theoretical predictions, this effect does not depend on hiding consumer information for experts.