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An Empirical Examination of Moral Hazard in the Vehicle Inspection Market, RAND Journal of Economics

Abstract

Moral hazard arises in "diagnosis-cure" markets such as auto repair and health care when sellers have an incentive to misrepresent a buyer's condition in order to increase demand for the treatments they supply. This article examines the market for California vehicle emission inspections. Using transaction-level data, I investigate whether the market provides incentives that lead inspectors to help vehicles pass and how the behavior of inspectors varies with their firm's organizational characteristics. I find that consumers are generally able to provide firms and inspectors incentives to help them pass, and I find cross-firm differences that are consistent with agency theory.

Type

Article

Author(s)

Thomas N. Hubbard

Date Published

1998

Citations

Hubbard, N. Thomas. 1998. An Empirical Examination of Moral Hazard in the Vehicle Inspection Market. RAND Journal of Economics. 29(2): 406-426.

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