Competition and credibility: an experimental investigation into credence good recommendations

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 o...

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Main Authors: Hue, Jun Yu, Low, Jimson Jia Hui, Sim, Zixuan
Other Authors: Yeo Xiong Wei, Jonathan
Format: Final Year Project (FYP)
Language:English
Published: Nanyang Technological University 2023
Subjects:
Online Access:https://hdl.handle.net/10356/166009
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author Hue, Jun Yu
Low, Jimson Jia Hui
Sim, Zixuan
author2 Yeo Xiong Wei, Jonathan
author_facet Yeo Xiong Wei, Jonathan
Hue, Jun Yu
Low, Jimson Jia Hui
Sim, Zixuan
author_sort Hue, Jun Yu
collection NTU
description 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.
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spelling ntu-10356/1660092023-04-23T15:33:19Z Competition and credibility: an experimental investigation into credence good recommendations Hue, Jun Yu Low, Jimson Jia Hui Sim, Zixuan Yeo Xiong Wei, Jonathan Yohanes Eko Riyanto School of Social Sciences YERIYANTO@ntu.edu.sg, jonathanyeo@ntu.edu.sg Social sciences::Economic development 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. Bachelor of Social Sciences in Economics 2023-04-18T12:31:07Z 2023-04-18T12:31:07Z 2023 Final Year Project (FYP) Hue, J. Y., Low, J. J. H. & Sim, Z. (2023). Competition and credibility: an experimental investigation into credence good recommendations. Final Year Project (FYP), Nanyang Technological University, Singapore. https://hdl.handle.net/10356/166009 https://hdl.handle.net/10356/166009 en HE1AY2223_11 application/pdf Nanyang Technological University
spellingShingle Social sciences::Economic development
Hue, Jun Yu
Low, Jimson Jia Hui
Sim, Zixuan
Competition and credibility: an experimental investigation into credence good recommendations
title Competition and credibility: an experimental investigation into credence good recommendations
title_full Competition and credibility: an experimental investigation into credence good recommendations
title_fullStr Competition and credibility: an experimental investigation into credence good recommendations
title_full_unstemmed Competition and credibility: an experimental investigation into credence good recommendations
title_short Competition and credibility: an experimental investigation into credence good recommendations
title_sort competition and credibility an experimental investigation into credence good recommendations
topic Social sciences::Economic development
url https://hdl.handle.net/10356/166009
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