How Do Consumers Motivate Experts? Reputational Incentives in an Auto Repair Market
Thomas N. Hubbard*    April 26, 2001

Abstract：Moral hazard exists in expert service markets because sellers have an incentive to
shade their reports of buyers’ 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% more likely to return to a firm at which they previously passed
than one at which they previously failed, and that demand is sensitive to firms’
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 its interaction with switching costs and
consumers’ beliefs that firms are relatively homogeneous.