Uncertainty and Reputation Effects in Credence Goods Markets

Credence-goods experiments have focused on stylized settings in which experts can perfectly identify the buyer’s best option and that option works without fail. However, in nature, credence goods involve uncertainties that complicate assessing the quality of service and advice. We introduce two sources of uncertainty. The first is diagnostic uncertainty; experts receive a noisy signal of buyer type so might make an ‘honest’ mistake when advising what is in buyers’ best interests. The second is service uncertainty; the services available to the buyers do not always work. Both sources of uncertainty make detection of expert dishonesty more difficult, so are hypothesized to increase dishonesty by experts and decrease buyers’ trust (willingness to consult experts for advice and to follow expert advice) – decreasing efficiency of the interactions. We also analyze how buyers use ratings and whether ratings restrain dishonesty and attenuate distrust by creating reliable reputations. In contrast to hypotheses, we find that uncertainty has no effect on honesty and increases trust; additionally, ratings do not improve efficiency of the transactions under uncertainty – in part due to buyers’ tendency to ‘shoot the messenger’ (give low ratings) when they buy service that does not work due to bad luck, and to give experts the ‘benefit of the doubt’ (high ratings) when they buy service that may have been intentionally overprovided (not in the buyer’s best interest).