The Fallback as Signal: Preserved Human Skill, Liability, and Competence Signaling in Credence-Good Markets under Improving AI

Abstract

Firms deploying imperfect AI must decide how much to keep humans engaged: engagement costs output but builds the fallback skill needed when it fails. A liability pledge whose expected cost falls in that skill restores single crossing on a type that is neither drawn nor embodied once in a good, but built, decaying and poachable. One engagement decision thus produces both the client-facing signal and the trajectory on which mobile workers sort. That conjunction is what is new. It yields a two-sided band of served work, a stakes threshold above which building beats free-riding, and a signal that never dies.

48 pages, 7 figures. v4: corrects Proposition 2 (schedule now starts at a participation threshold below which types pool); explicit pricing assumption; agent-based market rebuilt to price by belief and project the pledge against the rival; new Figure 6 on certification vs rival quality. Replication: https://doi.org/10.6084/m9.figshare.33317559