Credence goods markets are prone to fraudulent behavior and market inefficiencies due to informational asymmetries between sellers and customers. We examine experimentally the effects of diagnostic uncertainty and insurance coverage on the information acquisition and provision decisions by sellers and the trading decisions by consumers. Our results reveal that diagnostic uncertainty is a major source of inefficiency that decreases efficient service provision. Insurance coverage has a positive net effect on market efficiency, despite making information acquisition and efficient service provision less likely.
Balafoutas et al. (Fri,) studied this question.