When More Can Be Less: The Effect of Add-On Insurance on the Consumption of Professional Services

The emergence of online platforms for professional services (e.g., cosmetic procedures) represents a natural progression of e-commerce from search and experience goods to credence goods. Because of the deeply consequential nature of professional services and the large information asymmetries between customers and service providers, designing effective risk-reduction strategies is crucial for facilitating digital transactions of professional services. This paper studies whether and how the introduction of a novel risk-reduction strategy, the add-on insurance covering the potential cost of negative consequences (e.g., complications and unsatisfactory outcomes), affects the demand for professional services in online platforms. We leverage a policy change in an online platform for cosmetic procedures, which started to offer the add-on insurance for a subset of procedures in 2016. Our empirical analysis shows that the introduction of insurance increases the sales of low-risk procedures, but not those of high-risk ones. More importantly, the insurance has a negative spillover effect on uninsured competitors, regardless of their risk levels. The negative spillover effect on high-risk procedures is noteworthy because it hurts the sales of their uninsured competitors without increasing their own sales, reducing the overall demand. Our findings have important implications for platforms to design, deploy, and evaluate their risk-reduction strategies.