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Cooperation Without Enforcement? A comparative analysis of litigation and online reputation as quality assurance mechanisms

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  • Bakos, Yannis
  • Dellarocas, Chrysanthos

Abstract

Online reputation mechanisms are emerging as a promising alternative to more established mechanisms for promoting trust and cooperative behavior, such as legally enforceable contracts. As information technology dramatically reduces the cost of accumulating, processing and disseminating consumer feedback, it is plausible to ask whether such mechanisms can provide an economically more efficient solution to a wide range of moral hazard settings where societies currently rely on the threat of litigation in order to induce cooperation. In this paper we compare online reputation to legal enforcement as institutional mechanisms in terms of their ability to induce cooperative behavior. Furthermore, we explore the impact of information technology on their relative economic efficiency. We find that although both mechanisms result in losses relative to the maximum possible social surplus, under certain conditions online reputation outperforms litigation in terms of maximizing the total surplus, and thus the resulting social welfar

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File URL: http://hdl.handle.net/1721.1/1850
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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4295-03.

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Date of creation: 14 Apr 2003
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Handle: RePEc:mit:sloanp:1850

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
Phone: 617-253-2659
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

Related research

Keywords: Online Reputation Mechanisms; Quality Assurance; Litigation; Internet; Game Theory; E-commerce; Information Technology;

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Cited by:
  1. Robert Gazzale & Tapan Khopkar, 2011. "Remain silent and ye shall suffer: seller exploitation of reticent buyers in an experimental reputation system," Experimental Economics, Springer, vol. 14(2), pages 273-285, May.
  2. W. Bentley MacLeod, 2006. "Reputations, relationships and the enforcement of incomplete contracts," Discussion Papers 0506-23, Columbia University, Department of Economics.
  3. Dellarocas, Chrysanthos, 2004. "The Digitization of Word-of-Mouth: Promise and Challenges of Online Feedback," Working papers 4296-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Dellarocas, Chrysanthos, 2003. "The Digitization of Word-of-mouth: Promise and Challenges of Online Feedback Mechanisms," Working papers 4296-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Ekmekci, Mehmet, 2011. "Sustainable reputations with rating systems," Journal of Economic Theory, Elsevier, vol. 146(2), pages 479-503, March.
  6. Alp Atakan & Mehmet Ekmekci, 2009. "Reputation in Long-Run Relationships," Discussion Papers 1507, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Yabing Jiang & Hong Guo, 2012. "Design of Consumer Review Systems and Product Pricing," Working Papers 12-10, NET Institute.

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