New, Like New, or Very Good? Reputation and Credibility
We show that sellers may earn reputation for their \ability" to deliver high quality goods on average by honestly announcing the realised quality of items for sale every period. As the expected revenue stream from continuing with honest communication increases with their ability, high ability sellers remain honest while low ability sellers find it too costly and sometimes lie about quality for short-term gain. Thus, cheap-talk communication facilitates the market's learning of a seller's ability and strengthens reputation effects. We study this new reputation mechanism and the induced market dynamics, first when sellers cannot restart with a new identity and then when they can. We extend the analysis to various other situations such as voluntary refund and moral hazard.
|Date of creation:||Jul 2009|
|Date of revision:||27 Jan 2014|
|Publication status:||Published in The Review of Economic Studies, vol. 81, n°4, mars 2014, p. 1543-1574.|
|Contact details of provider:|| Postal: Manufacture des Tabacs, Aile Jean-Jacques Laffont, 21 Allée de Brienne, 31000 TOULOUSE|
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