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How Effective are Electronic Reputation Mechanisms? An Experimental Investigation

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  • Gary E. Bolton
  • Elena Katok
  • Axel Ockenfels

Abstract

Electronic reputation or "feedback" mechanisms aim to mitigate the moral hazard problems associated with exchange among strangers by providing the type of information available in more traditional close-knit groups, where members are frequently involved in one another's dealings. In this paper, we compare trading in a market with online feedback (as implemented by many Internet markets) to a market without feedback, as well as to a market in which the same people interact with one another repeatedly (partners 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 in the partners market, the benefits of trust and trustworthy behavior go to the whole community and are not completely internalized. We discuss the implications of this perspective for improving feedback systems.

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Bibliographic Info

Paper provided by University of Cologne, Department of Economics in its series Working Paper Series in Economics with number 3.

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Date of creation: 26 Nov 2003
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Publication status: Published in Management Science, Vol. 50, Number 11, Nov. 2004, 1587-1602
Handle: RePEc:kls:series:0003

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References

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  1. Miller, Nolan & Resnick, Paul & Zeckhauser, Richard, 2002. "Eliciting Honest Feedback in Electronic Markets," Working Paper Series rwp02-039, Harvard University, John F. Kennedy School of Government.
  2. Glen Ellison, 2010. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Levine's Working Paper Archive 631, David K. Levine.
  3. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August.
  4. Blount, Sally, 1995. "When Social Outcomes Aren't Fair: The Effect of Causal Attributions on Preferences," Organizational Behavior and Human Decision Processes, Elsevier, vol. 63(2), pages 131-144, August.
  5. Claudia Keser, 2002. "Trust and Reputation Building in E-Commerce," CIRANO Working Papers 2002s-75, CIRANO.
  6. Paul R. Milgrom & Douglass C. North & Barry R. Weingast, 1990. "The Role Of Institutions In The Revival Of Trade: The Law Merchant, Private Judges, And The Champagne Fairs," Economics and Politics, Wiley Blackwell, vol. 2(1), pages 1-23, 03.
  7. Roth, Alvin & Ockenfels, Axel & Ariely, Dan, 2005. "An Experimental Analysis of Ending Rules in Internet Auctions," Scholarly Articles 2579649, Harvard University Department of Economics.
  8. Paul Resnick & Richard Zeckhauser & John Swanson & Kate Lockwood, 2006. "The value of reputation on eBay: A controlled experiment," Experimental Economics, Springer, vol. 9(2), pages 79-101, June.
  9. Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
  10. Greif, Avner, 1989. "Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 857-882, December.
  11. Michael Smith & Erik Brynjolfsson, 1999. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Computing in Economics and Finance 1999 1022, Society for Computational Economics.
  12. 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.
  13. Alvin E. Roth, 2002. "The Economist as Engineer: Game Theory, Experimentation, and Computation as Tools for Design Economics," Econometrica, Econometric Society, vol. 70(4), pages 1341-1378, July.
  14. Paul Resnick & Christopher Avery & Richard Zeckhauser, 1999. "The Market for Evaluations," American Economic Review, American Economic Association, vol. 89(3), pages 564-584, June.
  15. Bolton, Gary E. & Katok, Elena & Ockenfels, Axel, 2005. "Cooperation among strangers with limited information about reputation," Journal of Public Economics, Elsevier, vol. 89(8), pages 1457-1468, August.
  16. Daniel Houser & John Wooders, 2006. "Reputation in Auctions: Theory, and Evidence from eBay," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(2), pages 353-369, 06.
  17. Axel Ockenfels, 2002. "Reputationsmechanismen auf Internet-Marktplattformen - Theorie und Empirie -," Papers on Strategic Interaction 2002-46, Max Planck Institute of Economics, Strategic Interaction Group.
  18. Werner Güth & Axel Ockenfels, 2002. "The Coevolution of Trust and Institutions in Anonymous and Non-anonymous Communities," Papers on Strategic Interaction 2002-07, Max Planck Institute of Economics, Strategic Interaction Group.
  19. Eric J. Friedman* & Paul Resnick, 2001. "The Social Cost of Cheap Pseudonyms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(2), pages 173-199, 06.
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