Competitive equilibrium fraud in markets for credence-goods by Yen-Lin Chiu and Edi Karni

This is a study of the nature and prevalence of persistent fraud in a competitive market for credence- quality goods. We model the market as a stochastic game of incomplete information in which the players are customers and suppliers and analyze their equilibrium behavior. Customers characteristics, idiosyncratic search cost and discount rate, are private information. Customers do not possess the expertise necessary to assess the service they need either ex ante or ex post. We show that there exists no fraud-free equilibrium in the markets for credence-quality goods and that fraud is a prevalent and persistent equilibrium phenomenon.