American Economic Journal: Microeconomics
no. 1, February 2022
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.
Fong, Yuk-Fai, Ting Liu, and Xiaoxuan Meng.
"Trust Building in Credence Goods Markets."
American Economic Journal: Microeconomics,
Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
Asymmetric and Private Information; Mechanism Design
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification