Competition and credibility: an experimental investigation into credence good recommendations

• Main Authors: Hue, Jun Yu, Low, Jimson Jia Hui, Sim, Zixuan
• Other Authors: Yeo Xiong Wei, Jonathan
• Format: Final Year Project
• Language: English
• Published: Nanyang Technological University 2023
• Subjects: Social sciences::Economic development
• Online Access: https://hdl.handle.net/10356/166009
• Institution: Nanyang Technological University

Credence Goods, or goods whose quality cannot be fully evaluated by the consumer, play a significant role in many industries. However, their markets have been consistently shown to be fraught with issues, including dishonest recommendations by sellers. This paper investigates the ethical behaviour of sellers when multiple credence goods that fulfil the same purpose are available for recommendation. Since buyers know about the commission structure of the sellers, sellers have to consider their perceived credibility when recommending a good. We posit that in such situations, competition and pledge-taking may affect their recommendations. To investigate this, we use a sender-receiver task adapted to a financial advisory game. Competition was operationalized as the availability of a second advisor. Our findings suggest that second advisors are much more dishonest than first advisors. The effect of competition on the quality of first advisors' recommendations varies depending on the optimal portfolio for the client. Furthermore, when second advisors are made privy to the first advisors' recommendations, the effect of competition is exacerbated. We also find that the pledges have a negative effect on the honesty of advisors. Finally, we find that Mach IV can predict the quality of first advisors' recommendations but not second advisors. Our study highlights the importance of understanding the role of competition and pledge-taking in the ethical behaviour of sellers in markets for credence goods. Implications of our findings for policy and practice are discussed.