Efficient Liability in Expert Markets

We study the design of efficient liability in expert markets. An expert may misbehave in two ways: prescribing the "wrong" treatment for a consumer's problem, or failing to exert proper effort to diagnose the problem. We show that under a range of liabilities, the expert will choose the efficient treatment based on his information if the price margins for alternative treatments are close enough. Moreover, a well-designed liability rule motivates the expert to also exert diagnosis effort efficiently. The efficient liability is facilitated by certain restriction on equilibrium prices; unfettered competition between experts, while maximizing consumer surplus, may undermine efficiency.