Communication, Feedbacks and Repeated Moral Hazard with Short-lived Buyers

Jullien, Bruno and Park, In-Uck (2019) Communication, Feedbacks and Repeated Moral Hazard with Short-lived Buyers. TSE Working Paper, n. 19-1027, Toulouse

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Abstract

We show that experience good sellers facing myopic buyers can solve the inherent moral hazard problem by communicating their observation of quality before trade,
provided that communication is part of their public track record. Such cheap-talk communication, if trusted, allows market prices to re
ect the actual value created, thus providing
an immediate reward for the seller's eort which complements the conventional, reputational incentives. Pre-trade communication achieves maximal eciency when truthful
and the full eciency as the noise in the seller's observation vanishes. We fully characterize the conditions for communication to improve eciency and the extent to which it
does so.

Item Type: Monograph (Working Paper)
Language: English
Date: July 2019
Place of Publication: Toulouse
Uncontrolled Keywords: cheap talk, moral hazard, reputation mechanism, trust.
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 27 Aug 2019 09:24
Last Modified: 27 Aug 2019 09:24
OAI ID: oai:tse-fr.eu:123182
URI: http://publications.ut-capitole.fr/id/eprint/32692

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