Although in the typical diamond transaction the buyer takes possession of the stone and promises to pay the seller at some time in the future, the buyer must still obtain information about the seller's reputation. Using lasers and chemical processes, diamonds can be treated to artificially enhance color and disguise flaws. Small flaws and differences in color dramatically affect the value of a stone. Many of these "treatments," however, cannot be detected without sophisticated equipment. Although in theory buyers could have every stone evaluated by a gemological laboratory to determine whether or not it had been altered, this would be prohibitively time consuming and expensive. Nevertheless, if a dealer purchases a "treated stone" and sells it to someone else who discovers the stone's treatment, he can be taken to the arbitration panel for failing to disclose the treatment. The panel must then decide whether the dealer knew or reasonably should have known of the stone's treatment. The reputation of the person he purchased the stone from is an important factor considered by the arbitrators.

XREF: Connects to information economics and reputation-as-signaling concepts from Akerlof's 'market for lemons' and game-theoretic treatments of trust.

Lisa Bernestein, Opting out of the Legal Sys…, loc. 131