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Competition Fosters Trust

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Author Info
Huck, Steffen
Ruchala, Gabriele K.
Tyran, Jean-Robert

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Abstract

We study the effects of reputation and competition in a stylized market for experience goods. If interaction is anonymous, such markets perform poorly: sellers are not trustworthy, and buyers do not trust sellers. If sellers are identifiable and can, hence, build a reputation, efficiency quadruples but is still at only a third of the first best. Adding more information by granting buyers access to all sellers’ complete history has, somewhat surprisingly, no effect. On the other hand, we find that competition, coupled with some minimal information, eliminates the trust problem almost completely.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6009.

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Date of creation: Dec 2006
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Handle: RePEc:cpr:ceprdp:6009

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Related research
Keywords: competition; experience goods; information conditions; moral hazard; reputation; trust;

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D40 - Microeconomics - - Market Structure and Pricing - - - General
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Labonne, Julien & Chase, Robert S., 2008. "A road to trust," Policy Research Working Paper Series 4706, The World Bank. [Downloadable!]
  2. Steffen Huck & Gabriele K. Ruchala & Jean-Robert Tyran, 2007. "Pricing and Trust," Discussion Papers 07-04, University of Copenhagen. Department of Economics. [Downloadable!]
    Other versions:
  3. Ernst Fehr, 2008. "On the Economics and Biology of Trust," SOEPpapers 154, DIW Berlin, The German Socio-Economic Panel (SOEP). [Downloadable!]
    Other versions:
  4. Uwe Dulleck & Rudolf Kerschbamer & Matthias Sutter, 2009. "The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition," Working Papers 2009-03, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
    Other versions:
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