Title: Right of Refusal Rights Reputation
by Metin Uyanik, Pimwilai Kijjanapanich (Thammasat University), Priscilla Man (UQ) and Carlos Oyarzun (UQ)
Abstract: We study the role of obligation-free quotes in an infinitely repeated interaction between a long-lived expert and short-lived consumers, where the expert may be good (aligned and informed) or bad (uninformed and biased. The consumers observe the expert’s past recommendations and whether they were accepted (right of refusal), but not the underlying state even at the ex-post stage (credence goods). The right of refusal of the consumers provides a mechanism for the good expert to recover his reputation and hence truth-telling is an equilibrium outcome in which the good expert reveals her type in finite time by consistently proposing correct recommendations. We show that this equilibrium outperforms a class of non-truth-telling equilibria when the bad expert’s favored option is not very likely. We show that the same result is true whether the bad expert is committed or strategic. Our results contrast sharply with models that do not allow right of refusal to the consumers and demonstrate how obligation-free quotes mitigate reputational distortions in expert markets.