Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/103887 
Year of Publication: 
2014
Series/Report no.: 
Diskussionsbeiträge No. 2014/29
Publisher: 
Freie Universität Berlin, Fachbereich Wirtschaftswissenschaft, Berlin
Abstract: 
We study contracting between a consumer and an expert. The expert can invest in diagnosis to obtain a noisy signal about whether a low-cost service is sufficient or whether a high-cost treatment is required to solve the consumer´s problem. This involves moral hazard because diagnosis effort and signals are not observable. Treatments are contractible, but success or failure of the low-cost treatment is observed only by the consumer. Payments can therefore not depend on the objective outcome but only the consumer´s report, or subjective evaluation. A failure of the low-cost treatment delays the solution of the consumer´s problem by the high-cost treatment to a second period. We show that the first-best solution can always be implemented if the parties - discount rate is zero; an increase in the discount rate reduces the range of parameter combinations for which the first-best can be obtained. In an extension we show that the first-best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents.
Subjects: 
credence goods
information acquisition
moral hazard
subjective evaluation
JEL: 
D82
D83
D86
I11
Document Type: 
Working Paper

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