Information and Incentives in Credence-Good Markets

This dissertation studies the role of information in credence-good markets. The first chapter examines information on the consumer side through costly information acquisition. After observing the expert’s recommendation, the consumer may acquire information to verify it. The chapter establishes that the relationship between verification costs and consumer surplus is non-monotonic. When verification is prohibitively costly, consumer surplus is driven to zero because the consumer cannot effectively discipline the expert. When verification is costless, consumer surplus is again zero because the expert can fully extract the gains from trade through pricing. By contrast, for an intermediate range of verification costs, a mutually beneficial outcome emerges: the expert lowers prices to build credibility more efficiently, and the consumer obtains positive surplus. The second chapter studies information on the supply side through an information-design approach. In this setting, the consumer observes a private signal before deciding whether to accept the expert’s recommendation. This chapter establish a sharp trade-off between truthful recommendations and consumer surplus: for any signal structure, if there exists an equilibrium in which recommendations are truthful, then equilibrium consumer surplus must be zero. Moreover, if a signal structure maximizes a weighted sum of consumer and expert welfare while delivering positive consumer surplus, then treatment is efficient for severe problems but inefficiently low for minor problems. Taken together, the two chapters highlight the fundamental limits of information as a tool for correcting distortions in credence-good markets. While information can improve outcomes, it cannot by itself eliminate the expert’s dual advantage in pricing and diagnosis, pointing to the potential importance of complementary regulatory or institutional interventions.