If the quality of provided services cannot be measured by customers, it is easier to cheat for sellers compared to other goods. Markets for so called credence goods like repair costs or medical therapies present large incentives for cheating. Together with his colleagues Prof. Dr. Rudolf Kerschbamer and Dr. Daniel Neururer from the University of Innsbruck, Prof. Dr. Matthias Sutter, chairholder of the “Chair of Economics: Design and Behavior” examined the role of insurances in these markets.

Costs increase by 80 percent for insured customers

Their result: Costs of repairing a computer increased by 80%, if the seller knew these costs were covered by an insurance company. Unnecessarily, single computer parts were replaced and the working hours were overstated. According to the study, insured customers are less critical compared to uninsured customers, as a third party bears the costs. Prof. Sutter and his colleagues call the buyer’s as well as the seller’s behaviour as second degree moral hazard.

The study

The study can be found in the current issue of “Proceedings of the National Academy of Sciences” (PNAS): http://www.pnas.org/content/early/2016/06/16/1518015113

A more detailed version of this news is available in German.