Trust Building in Credence Goods Markets

Abstract

We study trust building in credence-goods markets in a dynamic setting. When consumers’ expected loss is low and it is efficient to fix only the more severe problem, there is no trade in the one-shot game. In the repeated game, an expert’s honesty is monitored through consumers’ rejection of his recommendations. The expert’s profit in the optimal equilibrium weakly increases in the discount factor but does not achieve the first best, which contrasts sharply with the optimal equilibrium in experience-goods markets. The optimal equilibrium involves undertreatment if the expert is sufficiently patient, and overtreatment if he is moderately patient. (JEL C73, D82, D83, Z13)