Preventive-service fraud in credence good markets

Preventive dental care and automotive service is intended to preempt problems that, if they materialized, would require costly treatment or repair. In these markets fraud is both persistent and pervasive. This paper analyzes these markets invoking the notion of perfect Bayesian equilibrium of a stochastic dynamic games of incomplete information in which the players are customers and service providers. The services provided are credence because diagnosis and service are bundled and the customers lack the expertise necessary to assess the need for the prescribed service both ex ante and ex post. The analysis shows that fraud is a prevalent equilibrium phenomenon that is somewhat mitigated by customers’ loyalty.