We have all seen it: When you arrive in a unfamiliar city, you need a taxi driver and his local knowledge. Sometimes you supect the driver not to charge you correctly for the ride. This suspicion may be true says Professor. Dr. Matthias Sutter, chair in Economics: Design and Bahavior and his colleagues Loukas Balafoutas and Rudolf Kerschbamer of the University Innsbruck in their current study.

In a field experiment in the market for taxi rides the researchers investigate a phenomenon called second-degree moral hazard – the tendency of the supply side in a market to react to anticipated moral hazard on the demand side by increasing the extent or price of the service. The moral hazard manipulation consists of some passengers explicitly stating that their expenses will be reimbursed. This has a strong positive effect on the likelihood and the amount of overcharging and consequently increases consumer expenditure. The results suggest that second-degree moral hazard may have a severe impact on the provision of credence goods.

The study "Second-Degree Moral Hazard in a Real-World Credence Goods Market“ is published in The Economic Journal 127, February 2017. DOI: 10.111/ecoj.12260.


Contact
Professor Dr. Matthias Sutter
Phone: +49 (0) 221-470 1136
E-Mail: matthias.sutter@wiso.uni-koeln.de