How do consumers motivate experts? Reputational incentives in an auto repair market

Thomas N. Hubbard*

*Corresponding author for this work

Research output: Contribution to journalReview article

43 Scopus citations

Abstract

Moral hazard exists in expert-service markets because sellers have an incentive to shade their reports of the buyer's condition to increase the short-run demand for their services. The California vehicle emission inspection market offers a rare opportunity to examine how reputational incentives work in such a market. I show that consumers are 30 percent more likely to return to a firm at which they previously passed than to one at which they previously failed and that demand is sensitive to a firm's failure rate across all consumers. These and other results suggest that demand incentives are strong in this market because consumers believe that firms differ greatly in their consumer friendliness and are skeptical even about those they choose. Weak demand incentives in other expert-service markets are not a direct consequence of moral hazard, but rather of its interaction with switching costs and consumers' belief that firms are relatively homogeneous.

Original languageEnglish (US)
Pages (from-to)437-468
Number of pages32
JournalJournal of Law and Economics
Volume45
Issue number2 I
DOIs
StatePublished - Oct 1 2002

ASJC Scopus subject areas

  • Economics and Econometrics
  • Law

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