Arguing that consumers are the carriers of firms’ reputations, we examine the role of consumer networks for trust in markets that suffer from moral hazard. When consumers are embedded in a network, they can exchange information with their neighbours about their private experiences with different sellers. We find that such information exchange fosters firms' incentives for reputation building and, thus, enhances trust and efficiency in markets. This efficiency-enhancing effect is already achieved with a rather low level of network density.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
6624.
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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