In Insurance coverage of customers induces dishonesty of sellers in markets for credence goods
, a research paper in PNAS by German and Austrian economists, the authors show experimental evidence that electronics repair shops are more likely to overcharge for labor when their customers have insurance.
The researchers sent secret shoppers into 61 Austrian repair shops, who then used identical scripts to seek repairs for machines with identical, deliberately introduced defects (a bad stick of RAM); half then claimed to be insured for the repairs and the other half did not. A few shops were either incompetent or dishonest enough to recommend replacement of the machines, but those rare instances were evenly distributed in the “insured” and “non-insured” conditions.
However, one significant difference did emerge between the two conditions: one in six of the “insured” charged for procedures that were not needed, and on average, the “insured” shops charged for an extra 30 minutes of labor, resulting a much higher average cost for “insured” repairs (€130 vs €70). When these repair shops were interviewed afterward by the researchers, they said that they assumed the customer wouldn’t care, because they wouldn’t have to bear the costs.
This is in line with orthodox economic theory, which predicts that when a third party pays for a transaction that neither the customer nor the vendor have to pay for, a “moral hazard” is created that will lead to overbilling.
There were five cases where a shop billed for a repair that wasn’t needed (the authors termed this “overprovisioning”). This never happened in the control group, where insurance was never mentioned. This overprovisioning helped explain part of the largest effect the authors saw: while uninsured repairs cost an average of €70, insured ones averaged nearly €130, a difference that was highly statistically significant.
This difference in price is largely the product of billing for hours involved in repair. For shops that thought the customer was uninsured, repairs were billed as taking an average of a half hour less than the insured cases. Charges for this extra labor accounted for 70 percent of the price difference in repairs.
While the authors can’t tell for sure why this overbilling happened, they actually went back to shops and told staff members of their findings, and they asked what the employees thought might cause this behavior. The explanation favored by the shop employees themselves is simply that everyone assumed that an insured customer would be unconcerned about the price they paid for repairs.
Insurance coverage of customers induces dishonesty of sellers in markets for credence goods
[Rudolf Kerschbamera, Daniel Neururera, and Matthias Suttera/Proceedings of the National Academy of Science]
Computer repair shops take advantage of customers with insurance
[John Timmer/Ars Technica]
(Image: Computer Repair, Sean MacEntee, CC-BY)