Quality verification in markets with reputation: Theory and experiment

I investigate the interaction between two potential solutions to the moral hazard problem in markets for experience goods: quality verification and reputation building. I set up a dynamic quality choice model where short-lived buyers chose between a trusting and a distrusting action, and where a long-lived seller chooses between acting trustworthy or not. Through the presence of commitment behavioral types and the ability of buyers to observe the history of the seller, the seller can build and maintain a reputation. I extend this framework by letting buyers verify product quality at a cost. Contrary to what might be expected, the ability to verify product quality may hurt buyers. The reason is twofold. First, the ability to verify limits the ability of buyers to credibly commit to punishing distrusting behavior. Second, verification limits the ability of buyers to learn about the seller type from observation of previous actions. I implement a lab experiment to test the empirical content of the model.