Mechanism Design Theory and Its Role in Credence Goods Market; Emphasizing on an Islamic Perspective

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Abstract

Credence goods market is one of the markets that the asymmetric information has transformed it to a missing market. Those goods and services that the applicant cannot determine the exact amount of their expenses due to the asymmetric information are called credence goods. From the economists' perspective, transaction in a market where participants are ignorant about each other is a game with incomplete information. Hence, it is necessary to find a way to achieve a desired and optimal output by leading the individuals' strategic behaviour in incomplete information conditions. Mechanism design, as a sub-discipline of game theory, analyses how equilibrium behaviour depends on the rules. As well, it answers to this question that how rules that implement desired market outcomes look like. In addition, there are internal mechanisms such as Islamic and religious teachings that reduce more social losses arising from asymmetric information in credence goods market with a lower cost.
JEL Classification: C70, C78, C79, C90, D02, D82

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