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Trust Building in Credence Goods Markets

Author

Listed:
  • Yuk-Fai Fong
  • Ting Liu
  • Xiaoxuan Meng

Abstract

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.

Suggested Citation

  • Yuk-Fai Fong & Ting Liu & Xiaoxuan Meng, 2022. "Trust Building in Credence Goods Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 14(1), pages 490-528, February.
    • Handle: RePEc:aea:aejmic:v:14:y:2022:i:1:p:490-528
    DOI: 10.1257/mic.20180313
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    References listed on IDEAS

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    1. Asher Wolinsky, 1993. "Competition in a Market for Informed Experts' Services," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 380-398, Autumn.
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    Cited by:

    1. Liu, Ting & Ma, Ching-to Albert, 2024. "Equilibrium information in credence goods," Games and Economic Behavior, Elsevier, vol. 145(C), pages 84-101.
    2. Gerlach, Heiko & Li, Junqian, 2022. "Experts, trust and competition," Journal of Economic Behavior & Organization, Elsevier, vol. 198(C), pages 552-578.
    3. Wu, Cheng-Tai & Tsai, Tsung-Sheng, 2025. "Mandate or delegate? the optimal contract for credence goods with the expert’s endeavor," Journal of Economic Behavior & Organization, Elsevier, vol. 229(C).
    4. Sumana Kundu, "undated". "Undertreatment in credence goods markets: When does a no liability rule outperform?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2025-015, Indira Gandhi Institute of Development Research, Mumbai, India.
    5. Ogawa, Hiromasa, 2024. "Expert’s reputation concern and consumer information," Mathematical Social Sciences, Elsevier, vol. 131(C), pages 80-92.
    6. Gradwohl, Ronen & Jelnov, Artyom, 2024. "Partial credence goods on review platforms," Games and Economic Behavior, Elsevier, vol. 148(C), pages 517-534.

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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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