Verification and Reputational Concerns : An Experiment

I investigate the interaction between two solutions to the moral hazard problem in experience goods markets: Quality verification and reputational concerns. I set up an experimental market where a long-lived seller interacts with a sequence of shortlived buyers. Reputational concerns are induced by letting buyers observe previous decisions by sellers, and buyers may or may not be able to verify product quality at a cost before purchasing. My equilibrium analysis shows that costly quality verification may fully crowd out reputational concerns and lead to inferior outcomes. Results from the experiment indicate that the short-run incentives created by verification almost fully crowd out the reputational concerns