What Drives Fraud in a Credence Goods Market? – Evidence from a Field Study
| DOI | http://doi.org/10.1111/obes.12204 |
| Author | Alexander Rasch,Christian Waibel |
| Date | 01 June 2018 |
| Published date | 01 June 2018 |
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©2017 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 80, 3 (2018) 0305–9049
doi: 10.1111/obes.12204
What Drives Fraud in a Credence Goods Market? –
Evidence from a Field Study*
Alexander Rasch†,‡ and Christian Waibel§
†Duesseldorf Institute for Competition Economics (DICE), University of Duesseldorf,
Universitaetsstrasse 1, 40225 Duesseldorf, Germany (e-mail: rasch@dice.hhu.de)
‡Centre for European Economic Research, L 7, 1, 68161 Mannheim, Germany
§ETH Zurich, Zuerichbergstrasse 18, 8092 Zurich, Switzerland (e-mail: cwaibel@ethz.ch)
Abstract
This paper investigates the impact of competition on an expert firm’s incentive to defraud
its customers in a credence goods market. Controlling for the competence of car repair
shops, their financial situation, and reputational concerns, we use and complement the
data set from a nationwide field study conducted by the German Automobile Association
that regularly checks the reliability of garages in Germany. We find that more intense
competition lowers a firm’s incentive to defraud its customers.
I. Introduction
Making use of a field study in the German market for car repairs, we analyse the impact
of competition on an expert firm’s incentive to defraud its customers in a credence goods
market.1In credence goods markets (Darby and Karni, 1973), fraud may arise due to
asymmetric information between the expert and the customer:The expert knows the quality
of the good the customer needs and, in most cases, gives a treatment recommendation based
on a diagnosis and provides a treatment.The customer, however, does not know the quality
required and therefore must rely on the expert’s advice.
Our empirical analysis of corporate car repair firms shows that a higher degree of com-
petition lowers a firm’s incentive to defraud its customers.A larger number of competitors
in the market reduces customers’ search costs for obtaining a second opinion and hence
lowers experts’ incentives to defraud their customers. In our analysis, we control for the
JEL Classification numbers: D82, L15.
*We thank Hans-J¨urgen Andreß, Florian G¨ossl, David Jaeger, Rudolf Kerschbamer, Wanda Mimra, Michael
Pfaffermayr, Lamar Pierce, Bettina Rockenbach, Henry S. Schneider, Matthias Sutter, Achim Wambach, Roberto
Weber,Achim Zeileis, and seminar audiences in Cologne,Duesseldorf (DICE), Munich (LMU), and Vallendar(WHU)
for their helpful comments and discussions. Wealso thank two anonymous referees for their helpful suggestions and
Lisa Boxberg, Sarah Dahmen, Nicolas Fugger, Bj¨orn Haist, Marlene Scholz, and Dennis Uiberall who provided
excellent research assistance. Part of this research was done while Christian Waibel was visiting the University of
Innsbruck. He would like to express his sincere thanks to the University of Innsbruck for its hospitality throughout
his stay.
1See Dulleck and Kerschbamer (2006) for an overview of these markets.
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financial situation of garages, their competence, and reputational concerns. The results
suggest that a critical financial situation and low reputational concerns increase expert
fraud, whereas a high level of competence reduces such fraud.
Fraudulent behaviourand f aulty repairs are major issues in the car repair market(Wolin-
sky, 1993, 1995; Titus, Heinzelmann and Boyle, 1995; Consumer Federation of America
et al., 2011). The market for auto repairs and the scope of fraud therein are important
for two reasons: Firstly, the market itself is an important economic sector in industrial-
ized countries, and secondly, the insights from the functioning of this particular credence
goods market may help us to better understand the occurrence of fraud in other expert
markets. Many important markets exhibit credence goods properties, including the mar-
kets for healthcare, taxi services, legal advice, and other so-called ‘professional services’.
To analyse the fraudulent behaviour of experts, we make use of the results of a field study
in the German car repair market that is carried out on an annual basis by the German
Automobile Association (Allgemeiner Deutscher Automobil-Club e. V., ADAC), Europe’s
largest automobile club.
ADAC’s database contains information on fraud and the competence of firms. Specif-
ically, the automobile club has recorded whether firms illegally charged customers for
the provision of services, including charging for more repairs than were provided and for
providing more services than were necessary. We extend this database by collecting the
number of car repair shops in a 10-km distance from each firm’s location in order to quan-
tify the intensity of competition, as the level of competition among car repair shops is often
regarded as an important issue in the competition policy debate.
The seminal theoretical contribution on fraud in the car repair market is Taylor (1995),
who studies an expert’s incentive to overcharge his or her customers. The author shows that
under short-term contracts, experts will charge all customers for a treatment independent
of whether a car is faulty or not. Consequently, all customers whose cars are not faulty are
defrauded.
There have only been a few field studies focusing on the determinants of dishonest
behaviour in markets for credence goods.2Balafoutas et al. (2013) conducted a field ex-
periment on credence goods by investigatingtaxi ser vices inAthens, Greece. Their analysis
reveals that when passengers had poor information about optimal routes, they were taken
on longer detours. The authors also point out that a higher (perceived) customer income
increased the level of fraud. In a follow-up study, Balafoutas, Kerschbamer and Sutter
(2017) show that when passengers explicitly stated that they would be reimbursed by their
employer,they were almost twice as likely to be charged excessively compared to situations
in which drivers did not have such information.
Similar to our paper, Schneider (2012) analyses data from a field experiment in which
he visited garages undercover in order to investigate whether expert reputation can allevi-
ate the efficiency problems arising from asymmetric information. He finds both pervasive
overtreatment and undertreatment but no evidence that reputation helps to reduce these
2In addition to the literature on credence goods, our analysis is related to the literature on supplier-induceddemand
(see, e.g., Evans, 2000 for a seminal contribution). Empirical studies investigatingthe direct impact of infor mational
asymmetries on physicians’behaviour include Domenighetti et al. (1993), Currie, Lin and Zhang (2011), and Schmid
(2015).
©2017 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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