SECOND-DEGREE MORAL HAZARD IN A REAL-WORLD CREDENCE GOODS MARKET

In a field experiment in the market for taxi rides we investigate a phenomenon called second-degree moral hazard - the tendency of the supply side in a market to react to anticipated moral hazard on the demand side by increasing the extent or price of the service. Our moral hazard manipulation consists of some passengers explicitly stating that their expenses will be reimbursed. This has a strong positive effect on the likelihood and the amount of overcharging and consequently increases consumer expenditure. Our results suggest that second-degree moral hazard may have a severe impact on the provision of credence goods.