New, Like New, or Very Good? Reputation and Credibility

Bruno Jullien and In-Uck Park

The Review of Economic Studies, 2014, vol. 81, issue 4, 1543-1574

Abstract: We show that sellers may earn a reputation for their “ability” to deliver high-quality goods on average by honestly announcing the realized 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 second when they can. We extend the analysis to various other situations such as voluntary refund and moral hazard.

Date: 2014
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