Honest Garage: Getting Paid to Keep Mechanics Honest

Posted on January 17, 2008
Filed Under Business & Entrepreneurship, Finance & Economics, Ideas |

A couple of weeks ago I read an good paper in experimental economics (http://forum.johnson.cornell.edu/faculty/schneider/ ) and came away with an interesting idea for a small business venture.The paper is about asymmetric information in expert services and talks specifically about the car repair business.  The question that is being asked is essentially ‘are car mechanics honest or do they use their information advantage to take advantage of consumers?’

Henry Schnieder, the author of the paper, did a field experiment by rigging his car with a few simple problems that any certified mechanic would be able to diagnose (such as a loose battery cable which causes a car to not always start).  Before he did this he had the car checked out by a good certified mechanic to make sure the rigged problems were the only problems.

His findings were interesting in that only 27 of the 40 garages told Henry that he had a loose battery cable.  And 10 of the garages recommended costly and unnecessary repairs such as replacing the starter motor or battery cable.  His study shows that while reputation matters, there is still incentive for expert car mechanics to rip you off (25% of the time!).

Naturally this research leads to creating a venture that acts as a mechanism to keep the mechanics honest. By setting up good field experiments you can  provide a comprehensive ranking of certified car mechanics for one particular city.  The ranking could be done an an annual or semi-annual basis and could be provided online in a web based format. 

Of course, the obvious flaw with this model is that there is no inherent mechanism to prevent people from buying a subscription and then giving it away to his or her friends and family, thus reducing the profitability and sustainability of the project.

One potential solution to this probelm is to lower the price appropriately, perhaps $5 or $10, which would effectively reduce the cost, and in turn reduce the inventive to give it away.

I was discussing this reasearch and the opportunity for a sustainable business with one of my old economics professors, and she wisely pointed out that while a high price might encourage people to give a subscription away because of the cost, a low price may also produce the same incentive, since it might not be seen as a big deal.  Her thought was that if you were to create an “us versus them” mentality, then you could put the pricing somewhere in the middle (between high and low) and remove the inventive to give away information.

Another possible solution is to not make this a standalone business.  Instead, it could be part of a not for profit/research group that does this type of research anyway.   The findings could be sold to larger companies, such as Consumer Reports or AAA, instead of individual consumers.   Of couse this would require a much larger scale of operation: Instead of a city it would need to be a State or a region and eventually the nation.  Nonetheless, it could provide a significant amount of income to a university or other non-profit research group.

I like the last solution the best.  Mostly because it would be a good social business.  It is similar to how the girl scouts sell cookies while the boy scouts just keep asking for donations.

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