Experts and Their Records
NBER Working Paper No. 14921
Consider an environment where long-lived experts repeatedly interact with short-lived customers. In periods when an expert is hired, she chooses between providing a profitable major treatment or a less profitable minor treatment. The expert has private information about which treatment best serves the customer, but has no direct incentive to act in the customer's interest. Customers can observe the past record of each expert's actions, but never learn which actions would have been appropriate. We find that there exists an equilibrium in which experts always play truthfully and choose the customer's preferred treatment. The expert is rewarded for choosing the less profitable action with future business: customers return to an expert with high probability if the previous treatment was minor, and low probability if it was major.
If experts have private information regarding their own payoffs as well as what treatments are appropriate, then there is no equilibrium with truthful play in every period. But we construct equilibria where experts are truthful arbitrarily often as their discount factor converges to one.
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