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Adverse Selection or Moral Hazard, An Empirical Study

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  • Xiang Hui
  • Maryam Saeedi
  • Neel Sundaresan

Abstract

Markets prone to asymmetric information employ reputation mechanisms to address adverse selection and moral hazard. In this paper, we use a change in such a reputation mechanism to examine its effect on improving adverse selection and moral hazard. In May, 2008, eBay changed its reputation mechanism to prevent sellers from giving negative feedback to buyers. This change was intended to prevent sellers from retaliating against buyers who gave them negative feedback. We observe an improvement in the overall quality of the marketplace as a result of this change. We attribute 49%–77% of this improvement to reduced adverse selection as low‐quality sellers exit the market or their market share drops, and the rest to a reduction in moral hazard as sellers improve the quality of their service.

Suggested Citation

  • Xiang Hui & Maryam Saeedi & Neel Sundaresan, 2018. "Adverse Selection or Moral Hazard, An Empirical Study," Journal of Industrial Economics, Wiley Blackwell, vol. 66(3), pages 610-649, September.
    • Handle: RePEc:bla:jindec:v:66:y:2018:i:3:p:610-649
    DOI: 10.1111/joie.12183
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    Cited by:

    1. Xiang Hui & Tobias J. Klein & Konrad Stahl, 2021. "When and Why Do Buyers Rate in Online Markets?," CRC TR 224 Discussion Paper Series crctr224_2021_267v1, University of Bonn and University of Mannheim, Germany.
    2. Xiang Hui, 2020. "Facilitating Inclusive Global Trade: Evidence from a Field Experiment," Management Science, INFORMS, vol. 66(4), pages 1737-1755, April.
    3. Han, Xintong & Li, Yushen & Wang, Tong, 2023. "Peer recognition, badge policies, and content contribution: An empirical study," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 691-707.
    4. Dante Donati, 2022. "The End of Tourist Traps: A Natural Experiment on the Impact of Tripadvisor on Quality Upgrading," CESifo Working Paper Series 9834, CESifo.
    5. Andrey Fradkin & Elena Grewal & David Holtz, 2021. "Reciprocity and Unveiling in Two-Sided Reputation Systems: Evidence from an Experiment on Airbnb," Marketing Science, INFORMS, vol. 40(6), pages 1013-1029, November.

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