Bruno Jullien, and In-Uck Park, “New, Like New, or Very Good? Reputation and Credibility”, The Review of Economic Studies, vol. 81, n. 4, March 2014, pp. 1543–1574.
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.
Bruno Jullien, and In-Uck Park, “New, Like New, or Very Good? Reputation and Credibility”, TSE Working Paper, n. 09-086, July 2009, revised January 29, 2014.