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How Effective are Online Reputation Mechanisms?

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  • Gary Bolton
  • Elena Katok
  • Axel Ockenfels

Abstract

Online reputation - "feedback" - mechanisms aim to mitigate the moral hazard problems associated with spatially distant exchange among strangers by providing traders with the type of information available in small groups, where members are frequently involved in one another's dealings. We compare trading in a market with feedback to a market without, as well as to a market in which the same people interact with one another repeatedly (partner market). We find that, while the feedback mechanism induces quite a substantial improvement in transaction efficiency, it also exhibits a kind of public goods problem in that, unlike the partners market, the benefits of trust and trustworthy behavior go to the whole community and are not completely internalized. We discuss the implecations of this perspective for improving these systems.

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Paper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Papers on Strategic Interaction with number 2002-25.

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Date of creation: May 2002
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Handle: RePEc:esi:discus:2002-25

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  1. Blount, Sally, 1995. "When Social Outcomes Aren't Fair: The Effect of Causal Attributions on Preferences," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 63(2), pages 131-144, August.
  2. Dan Ariely & Axel Ockenfels & Alvin E. Roth, 2005. "An Experimental Analysis of Ending Rules in Internet Auctions," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 890-907, Winter.
  3. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
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