Competition Fosters Trust

Steffen Huck, Gabriele K. Ruchala and Jean-Robert Tyran ()

No 6009, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the effects of reputation and competition in a stylized market for experience goods. If interaction is anonymous, such markets perform poorly: sellers are not trustworthy, and buyers do not trust sellers. If sellers are identifiable and can, hence, build a reputation, efficiency quadruples but is still at only a third of the first best. Adding more information by granting buyers access to all sellers’ complete history has, somewhat surprisingly, no effect. On the other hand, we find that competition, coupled with some minimal information, eliminates the trust problem almost completely.

Keywords: competition; experience goods; information conditions; moral hazard; reputation; trust (search for similar items in EconPapers)
JEL-codes: C72 C92 D40 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-exp and nep-soc
Date: 2006-12
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