From Digital Distrust to Codified Honesty: Experimental Evidence on Generative AI in Credence Goods Markets

Abstract: Generative AI is transforming the provision of expert services. This article uses a series of one-shot experiments to quantify the behavioral, welfare and distribution consequences of LLMs on AI-AI, Human-Human, Human-AI and Human-AI-Human expert markets. Using a credence goods framework where experts have private information about the optimal service for consumers, we find that Human-Human markets generally achieve higher levels of efficiency than AI-AI and Human-AI markets through pro-social expert preferences and higher consumer trust. Notably, LLM experts still earn substantially higher surplus than human experts -- at the expense of consumer surplus - suggesting adverse incentives that may spur the harmful deployment of LLMs. Concurrently, a majority of human experts chooses to rely on LLM agents when given the opportunity in Human-AI-Human markets, especially if they have agency over the LLM's (social) objective function. Here, a large share of experts prioritizes efficiency-loving preferences over pure self-interest. Disclosing these preferences to consumers induces strong efficiency gains by marginalizing self-interested LLM experts and human experts. Consequently, Human-AI-Human markets outperform Human-Human markets under transparency rules. With obfuscation, however, efficiency gains disappear, and adverse expert incentives remain. Our results shed light on the potential opportunities and risks of disseminating LLMs in the context of expert services and raise several regulatory challenges. On the one hand, LLMs can negatively affect human trust in the presence of information asymmetries and partially crowd-out experts' other-regarding preferences through automation. On the other hand, LLMs allow experts to codify and communicate their objective function, which reduces information asymmetries and increases efficiency.