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Communication, Feedbacks and Repeated Moral Hazard with Short-lived Buyers

Author

Listed:
  • Bruno Jullien

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • In-Uck Park

Abstract

We show that experience good sellers facing myopic buyers can solve the inherent moral hazard problem by communicating their observation of quality before trade, provided that communication is part of their public track record. Such cheap-talk communication, if trusted, allows market prices to reflect the actual value created, thus providing an immediate reward for the seller's effort which complements the conventional, reputational incentives. Pre-trade communication achieves maximal efficiency when truthful and the full efficiency as the noise in the seller's observation vanishes. We fully characterize the conditions for communication to improve efficiency and the extent to which it does so.

Suggested Citation

  • Bruno Jullien & In-Uck Park, 2020. "Communication, Feedbacks and Repeated Moral Hazard with Short-lived Buyers," Working Papers hal-03095669, HAL.
    • Handle: RePEc:hal:wpaper:hal-03095669
    DOI: 10.2139/ssrn.3655043
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    Cited by:

    1. Fudenberg, Drew & Gao, Ying & Pei, Harry, 2022. "A reputation for honesty," Journal of Economic Theory, Elsevier, vol. 204(C).

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