Rating systems measuring quality of products and services (i.e., the state of the world) are widely used to solve the asymmetric information problem in markets. Decision makers typically make binary decisions such as buy/hold/sell based on aggregated individuals' opinions presented in the form of ratings. Problems arise, however, when different rating metrics and aggregation procedures translate the same underlying popular opinion to different conclusions about the true state of the world. This paper investigates the inconsistency problem by examining the mathematical structure of the metrics and their relationship to the aggregation rules. It is shown that at the individual level, the only scale metric (1,. . . ,N) that reports people's opinion equivalently in the a binary metric (-1, 0, 1) is one where N is odd and N-1 is not divisible by 4. At aggregation level, however, the inconsistencies persist regardless of which scale metric is used. In addition, this paper provides simple tools to determine whether the binary and scale rating systems report the same information at individual level, as well as when the systems di®er at the aggregation level.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
16947.
Find related papers by JEL classification: D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Klein, Tobias & Lambertz, Christian & Spagnolo, Giancarlo & Stahl, Konrad O., 2006.
"Last Minute Feedback,"
CEPR Discussion Papers
5693, C.E.P.R. Discussion Papers.
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Tobias J. Klein & Christian Lambertz & Giancarlo Spagnolo & Konrad O. Stahl, 2005.
"Last Minute Feedback,"
Discussion Papers
62, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich, revised Mar 2006.
[Downloadable!]