Trust Building in Credence Goods Markets
- American Economic Journal: Microeconomics (Forthcoming)
We study trust building in credence-goods markets in a dynamic
setting. When consumers' expected loss is low and it is efficient
to fix only the more severe problem, there is no trade in the one-shot game. In the repeated game, an expert's honesty is monitored through consumers' rejection of his recommendations. The
expert's profit in the optimal equilibrium weakly increases in the
discount factor but does not achieve the first best, which contrasts
sharply with the optimal equilibrium in experience-goods markets.
The optimal equilibrium involves undertreatment if the expert is
sufficiently patient, and overtreatment if he is moderately patient.
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