Competition Fosters Trust

Steffen Huck, Gabriele K. Ruchala and Jean-Robert Tyran ()
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Gabriele K. Ruchala: Department of Economics, University of Erfurt

No 06-22, Discussion Papers from University of Copenhagen. Department of Economics

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: experience goods; competition; reputation; trust; moral hazard; information conditions (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: 2006-11
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Working Paper: Competition Fosters Trust (2006)
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