Competition Fosters Trust

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

JEL Classification: C72, C92, D40, L14