Inspection in Markets for Experience Goods∗

We consider a simple dynamic “collective reputation” model of a market for an expericence good into which we introduce imperfect quality inspections. In each period two markets operate: a market for sellers who have been “honest” in the past, and a market for sellers who have been “dishonest” in the past. In every period, the quality of produced goods is inspected, and those sellers who have been found to produce low quality goods are barred from trading in the market for honest sellers in the next period. We demonstrate that the average quality in both markets may plausibly decrease as the probability with which low quality is detected increases. A few implications of our results are discussed. Jel Classification numbers: