Economic Theory - Priscilla Man (UQ)

Title: Obligation-free Quotes

Abstract: This paper proposes that obligation-free quotes, the arrangement that a consumer can obtain a recommendation from an expert without the commitment to purchase, is an efficiency-enhancing device in a credence good industry. By de-coupling the punishment for bad reputation (that is, no future purchase) from the current recommendation offered, obligation-free quotes reduce the experts’ incentives to distort recommendations due to reputation concerns, thereby preventing the ‘bad reputation problem’ (Ely and Välimäki, 2003 QJE). In addition, under obligation-free quotes, a good expert’s type is almost surely revealed as time goes to infinity.