Article in a working paper series:
We show that sellers may earn reputation for their \ability" to deliver high quality goods on average by honestly announcing the realised 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 then when they can. We extend the analysis to various other situations such as voluntary refund and moral hazard.
Industrial Organization, Regulation and Competition Policy
C73: Stochastic and Dynamic Games
D82: Asymmetric and Private Information
D83: Search, Learning, and Information
L14: Transactional Relationships; Contracts and Reputation