Theoretical and Behavioural Economics Seminar -Johannes Hörner (TSE)

Abstract: We consider an economy in which long-lived experts are continuously matched with short-lived clients. The outcome of an interaction is determined by the client’s type and the expert’s level of expertise. Experts choose the type of client with whom the match, but this choice is unobservable to the market. We study the effects of providing information about otherwise unobservable outcomes to the market, such as in the form of “medical report cards,” in an effort to help clients identify high-quality experts.

The provision of such information can lead to inefficient matches, as experts turn away risky clients in order to ensure good outcomes and thereby build their reputation. In some cases, the provision of information can reduce aggregate welfare. Withholding some, but not all, information from the market can mitigate the perverse incentives and improve welfare, at the cost of sometimes misallocating experts who are known to be inept to high-risk clients.

Location: Physics A1/3

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