Why Labels Fail: Fraud on a Market for Credence Goods with Unobservable Skill Heterogeneity among Experts

Published on 24 March 2023

By Esther Raineau-Rispal

Asymmetries of information and uncertainty about product quality are often a central issue for customers. It is particularly the case in the construction market, where firms act as experts providing both the diagnosis and the technical solutions to their clients, who are usually unable to assess them. As this sector is becoming more and more prevalent in the conversation on global warming and the energy efficiency gap, it is important to understand how its unique characteristics call for carefully designed policies. This article presents a credence-good model with skill heterogeneity among experts meant to replicate key features of the sector, focusing on maintenance and retrofit services. In particular, the equilibrium is characterized by a low and unique market price, and skilled firms cannot distinguish themselves from their unskilled counterparts. This setup is then used to contrast the efficiency of two public policy tools implemented to make construction markets more efficient: human capital development investments and quality labels. Analytical results indicate that the latter may impact over-treatment, but does not affect the level of under-treatment in equilibrium, while increasing the number of skilled firms is always efficient to increase customer satisfaction. Under this model’s assumptions, if the goal is to ensure the proper renovation of the building stock, labels miss the mark.

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