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Fall 2012

ISSN 0890-913X

Volume 28, Number 1

Categories: Fall 2012 | Economics

How Firms Can Build Trust When Products Have Hidden Characteristics

Craig J. Richardson, Winston-Salem State University

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TheJournalofPrivateEnterprise28(1),2012,1–22HowFirmsCanBuildTrustWhenProductsHaveHiddenCharacteristicsCraigJ.Richardson*Winston-SalemStateUniversityAbstractApotentiallylargeprobleminsomemarketsisthatlowtrustoccursbetweenconsumersandfirmswhereproductqualityandthefirm’stimeframearedifficulttodiscern.Thepaperemploysasimpleheuristicmodelthatseekstoexplainunderwhatcircumstancesfirmswillseektobuildareputationforhonesty—or“cutandrun”withshort-runprofits.Thecontributionsherearetwo:First,toexpandontheideathatfirmscanbuildareputationbyconfessingadefect(orotherwisesacrificingshort-termprofits)andtwo,toemphasizehowthetimeframeofthefirmplaysacriticalroleinwhetherornotitwillbehonest.Thepaperexplainshowtrustinthesemarketscanbeimprovedasthetimeframelengthens.JELCodes:D82,K2,L51Keywords:Asymmetricinformation;Reputation;Regulation;Trust;HiddenI.IntroductionFirmssometimeshaveenticementstoplaceshort-termprofitsaheadofconsumers’bestinterestsinwhathasbeencalled“opportunistic”behavior.Thiscanoccurinsituationswheretheproduct’squalityisdifficulttoassessorwherefirmshavelittleatstakeinthelongrun.ButGordonTullock(1985)concludedthattheproblemofopportunisticbehaviorwasactuallydispensedwithbyAdamSmithhimself,throughwhatTullocksummarizedasthe“disciplineofcontinuousdealings.”Merchantswillloseavaluableasset—theirreputation—iftheyshortchangetheircustomers.*IespeciallythankSusanDudleyandDanielKleinfornumeroussuggestionsandcommentsalongwithGeraldBrock,HowardBeales,andJonathanWight.IalsothankMarioRizzoandallattendeesoftheJanuary30,2012NewYorkUniversityColloquiumonMarketInstitutionsandEconomicProcessesfortheircommentsonapreviousdraft.Anyerrorsoromissionsremainmyown.1

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Title	How Firms Can Build Trust When Products Have Hidden Characteristics
Authors/Creators:	Craig J. Richardson, Winston-Salem State University
Year:	2012
Volume:	28
Number:	1
Pages:	1 - 22
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	Asymmetric information, Reputation, Regulation, Hidden, Trust, Firms

Citation:
Richardson, Craig J. / 2012. "How Firms Can Build Trust When Products Have Hidden Characteristics." The Journal of Private Enterprise, 28(1): 1-22.