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Experts and quacks

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  • Jeremy A. Sandford

Abstract

What happens when “type” is endogenous in a reputational setting? Here, customers cannot tell “experts” from imitative “quacks,” but gain information through repeated interaction. Firm incentives to invest in expertise vary nonmonotonically in how tolerant customers are of bad outcomes; more tolerant customers are both more forgiving, making expertise less necessary, and longer tenured, increasing the value of retaining them. In equilibrium, the proportion of expert firms is bounded away from one; some quacks are necessary to keep incentives of experts in line. The fraction of experts is decreasing in customers' switching costs and the relative cost of expertise over quackery.

Suggested Citation

  • Jeremy A. Sandford, 2010. "Experts and quacks," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 199-214, March.
    • Handle: RePEc:bla:randje:v:41:y:2010:i:1:p:199-214
    DOI: 10.1111/j.1756-2171.2009.00096.x
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    References listed on IDEAS

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    1. Johannes Hörner, 2002. "Reputation and Competition," American Economic Review, American Economic Association, vol. 92(3), pages 644-663, June.
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    Cited by:

    1. Ajit Mishra & Andrew Samuel, 2018. "Law Enforcement And Wrongful Arrests With Endogenously (In)Competent Officers," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 1417-1436, April.

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