Cheap Talk Referrals of Differentiated Experts in Repeated Relationship

Abstract

This paper examines the effectiveness of cheap talk advice in recurrent relationships between a customer, and multiple experts who provide professional services with differentiated specialties. Specifically, the sustainable honesty level is characterized in relation to the degree of rivalry among the experts. The three main findings are: 1) Fully honest advice may not be sustained if the profitability of service provision varies widely across problems. 2) As the number of experts increases due to a higher degree of specialization, the maximum equilibrium honesty level deteriorates. 3) Nonetheless, the equilibria that pass a certain credibility check on their punishment phases, implement the same (unique) honesty level regardless of the number of experts. Furthermore, the customer can extract this honesty level by appointing a panel of only one or two (but no more) experts and consulting them all the time.

Keywords: Cheap talk, reputation, experts

JEL Classification: D82