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Efficiency and Robustness of Binary Feedback Mechanisms in Trading Environments with Moral Hazard

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Author Info
Dellarocas, Chrysanthos
Abstract

This paper offers a systematic exploration of online feedback mechanism design issues in trading environments with opportunistic sellers, imperfect monitoring of a seller's effort level, and two possible transaction outcomes (corresponding to "high" and "low" quality respectively), one of which has no value to buyers. The objective of feedback mechanisms in such settings is to induce sellers to exert high effort and, therefore, to maximize the probability of high quality outcomes. I study a practically significant family of mechanisms that resembles aspects of the one used by online auction house eBay. These feedback mechanisms solicit "binary" ratings of transaction outcomes as either positive or negative and publish the sums of ratings posted by buyers on a seller during the N most recent periods. My analysis finds that such "binary" feedback mechanisms can induce high average levels of cooperation that remain stable over time. Surprisingly, their efficiency cannot be improved by summarizing larger numbers of ratings or by publishing a seller's detailed feedback history. I further examine the robustness of these mechanisms to incorrect or incomplete feedback as well as to strategic changes of online identities. The theoretical outcomes predicted by this paper are consistent with empirical observations and offer theory-backed explanations to hitherto poorly understood phenomena such as the remarkably low fraction of negative feedback on eBa

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Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4297-03.

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Date of creation: 14 Apr 2003
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Handle: RePEc:mit:sloanp:1852

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

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Related research
Keywords: Online Feedback Mechanisms; E-commerce; Moral Hazard; Game Theory; Electronic Markets; Internet;

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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. [Downloadable!]
  2. Michihiro Kandori & Hitoshi Matsushima, 1998. "Private Observation, Communication and Collusion," Econometrica, Econometric Society, vol. 66(3), pages 627-652, May.
  3. 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. [Downloadable!] (restricted)
    Other versions:
  4. Fudenberg Drew & Levine David K., 1994. "Efficiency and Observability with Long-Run and Short-Run Players," Journal of Economic Theory, Elsevier, vol. 62(1), pages 103-135, February. [Downloadable!] (restricted)
    Other versions:
  5. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June. [Downloadable!] (restricted)
  6. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  7. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January. [Downloadable!] (restricted)
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  8. North, Douglass C, 1991. "Institutions," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 97-112, Winter. [Downloadable!] (restricted)
  9. Eric J. Friedman* & Paul Resnick, 2001. "The Social Cost of Cheap Pseudonyms," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 10(2), pages 173-199, 06. [Downloadable!] (restricted)
  10. 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. [Downloadable!]
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