Credence Goods and Post-Contract Verification: Reputation in the Market for Security Services
Darby and Karni’s groundbreaking work in economics introduced the concept of a credence good, defined as a good whose quality cannot be reliably evaluated by consumers even after purchase. Credence goods cannot be easily assessed either before or after use. As such, they fall between a search good (whose quality can be observed before purchase) and an experience good (whose quality becomes apparent only after use). Using this framework, the market for security services can be understood as a credence-good market, because the success of security services is reflected in the absence of observable negative outcomes.
Security as a Credence Good
Security services for special events, retail or commercial properties, and executive protection have a preventive character. When a guard deters theft or violence, the “output” of the service is the absence of loss resulting from the guard’s presence. Consequently, the client has no direct way to verify whether the security provision was effective. How can a client know whether staffing levels and guard training were appropriate, or whether a different provider would have delivered higher quality?
This creates a post-contract verification problem. Even months into a contract, the buyer may lack sufficient information to determine whether the provider has delivered the highest quality service available. This differs fundamentally from experience goods such as restaurants, where customers directly observe and evaluate service quality.
As Darby and Karni show, credence markets are prone to under-provision of quality, overcharging, and moral hazard(providers have incentives to reduce training, staffing, or compliance when monitoring is weak). Because buyers face persistent uncertainty about quality, they may underpay or overpay for services, leading to inefficient market outcomes.
Reputation as a Substitute for Verification
In credence-based markets, firm reputation acts as a primary economic mechanism for quality signalling. Consumers rely on indirect indicators of quality when direct verification is costly or impossible. The use of such indicators has expanded with digital technology in the context of security services.
Online interaction enables firms to:
- Indicate licensing and regulatory compliance
- Present certifications and insurance coverage
- Demonstrate guard training procedures
- Provide case studies and testimonials
A firm’s digital reputation can partially substitute for direct verification. Firms with positive reviews, visible certifications, and documented compliance histories reduce buyers’ perceived risk. Reputation can therefore be understood as a form of capital—often termed reputational capital—that firms accumulate over time.
Economic Forces Driving the Shift
The significance of reputation in security markets is reinforced by several structural forces.
Urbanization and commercial density have increased the demand for professional security; as more firms transfer their protection needs to for-profit companies instead of relying on informal arrangements, they are contributing to the overall growth of the market. The global private security market is estimated to be in excess of $200 billion and will continue to grow.
There has also been an increase in the liability exposure--businesses now have legal and insurance ramifications if security failures occur. This increases demand for businesses to demonstrate compliance and adhere to professional standards. Therefore, buyers will be more likely to pay attention to verifiable credentials.
In addition, the ability to search online has resulted in dramatically lower costs for obtaining information. Clients are able to find multiple service providers, compare their certifications, and read about third-party evaluations of each. Consequently, while this reduces the amount of information asymmetry that exists in the marketplace, it does not eliminate it.
Real-World Implications
Examine the security of large events in big metropolitan centers. A stadium or convention center that hires security protection cannot constantly monitor every security guard and his/her attentiveness to duty; therefore, they depend on the contract that defines the terms of the security service, documentation of the security service’s insurance coverage, and finally, the reputation of the security service firm based on its past engagements with that venue. The presence of online reviews in combination with documented compliance history can affect the purchasing decision when hiring a security contractor.or.
In the same way, retailers will often require security contractors to provide proof of surety bonds and training requirements before contracting with them, and for those firms that provide those credentials via public display online have a competitive advantage.
Ramifications
The reputational equilibrium has major effects. Firms with high quality are able to signal their attributes more credibly and distinguish themselves from lower-quality competitors. However, reputation systems can be manipulated through fake reviews or superficial claims of service provision.
Regulation often arises in credence markets to provide credibility to firms, and mandatory licensing, background checks, and insurance requirements are used to increase market transparency. Compliance with such regulations therefore becomes an overt signal in competitive markets.
In welfare terms, increased information reduces the likelihood of adverse selection and enhances market efficiency; however, because preventive outcomes are inherently unobservable, credence problems cannot be fully resolved.
Conclusion
Darby and Karni’s theory of credence goods provides a strong foundation for understanding the economics of security services. Post-contract verification limits the ability to assess a security services provider’s success in preventing losses, leaving clients little choice but to rely on reputation and signalling as substitutes for direct quality assessment. Digital platforms have increased the use of these signals, creating new mechanisms for establishing trust in high-stakes local service markets. In such markets, where there is no direct method for evaluating service quality, reliance on provider reputation functions as an economic mechanism that enables transactions to occur under conditions of uncertainty.
