Drivers of behavior in Credence Goods markets with verifiability

• Applicant: Dr. Malte Griebenow
• Subject Area: Economic Policy, Applied Economics
• Term: since 2025
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 565303225

This research proposal focuses on the dynamics within Credence Goods markets, an area characterized by a significant asymmetry of information between experts and customers. A critical issue in these markets is the potential exploitation of the expert’s informational advantage, resulting in unnecessary services or inappropriate product recommendations, as seen in healthcare, car repair, and financial advice. This project seeks to enhance our understanding of agent behavior in these markets by exploring three key aspects: agent sophistication, learning, and agent heterogeneity in preferences and sophistication. A theoretical model with these features will be developed and tested through laboratory experiments. Project Part S - Sophistication: The objective of this part is to study the impact of participant sophistication on market outcomes. Notably, agent behavior in previous experiments deviated from theoretical predictions. This part seeks to test whether a lack of sophistication can explain these deviations by testing predictions of a model involving heterogeneous levels of altruism, inequality aversion, and levels of sophistication. Project Part L - Learning: This part investigates whether agent sophistication in Credence Goods markets can be enhanced through training in backward induction, using ring games as a context for training. It tests if such learning improves market efficiency and customer payoffs by enabling agents to form accurate expectations about behaviors of the respective other agents. Results will provide insights into the malleability of strategic sophistication and its transferability across contexts. Project Part H - Heterogeneity: This part addresses the inefficiencies caused by heterogeneity in expert preferences and sophistication, particularly how egoistic experts mimic the price setting of altruistic ones, undermining market efficiency. A proposed budget-neutral policy combines subsidies for high-quality services with taxes for low-quality ones, incentivizing efficient outcomes. This project aims to contribute to the creation of effective policy measures to improve market efficiency by improving our understanding of agent behavior in Credence Goods markets. If agents behave in an unsophisticated manner, price transparency and verifiability of service quality may not be sufficient to enhance efficiency. Instead, sensitizing agents for the incentive structure that govern their economic interactions is crucial. Further, the proposed subsidy-tax-policy could help to enhance the robustness of Credence Goods markets with respect to agents being heterogeneous in their preferences and levels of sophistication.

• DFG Programme: Research Grants