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Reputation and adverse selection: theory and evidence from eBay

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  • Maryam Saeedi

Abstract

How can a marketplace introduce mechanisms to overcome inefficiencies caused by adverse selection? In this article, I use a unique data set that follows eBay sellers to show that reputation is a major determinant of price variations. I develop a model of sellers' dynamic behavior where sellers have heterogeneous qualities unobservable by buyers. Using reputation as a signal of quality, I structurally estimate the model to uncover buyers' utility and sellers' costs and underlying qualities. I show that removing the reputation mechanism increases low‐quality sellers' market share, lowers prices, and consequently reduces sellers' profit by 66% and consumer surplus by 35%.

Suggested Citation

  • Maryam Saeedi, 2019. "Reputation and adverse selection: theory and evidence from eBay," RAND Journal of Economics, RAND Corporation, vol. 50(4), pages 822-853, December.
  • Handle: RePEc:bla:randje:v:50:y:2019:i:4:p:822-853
    DOI: 10.1111/1756-2171.12297
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    Cited by:

    1. Zemin (Zachary) Zhong, 2022. "Chasing Diamonds and Crowns: Consumer Limited Attention and Seller Response," Management Science, INFORMS, vol. 68(6), pages 4380-4397, June.
    2. Alberto Bracci & Jorn Boehnke & Abeer ElBahrawy & Nicola Perra & Alexander Teytelboym & Andrea Baronchelli, 2021. "Macroscopic properties of buyer-seller networks in online marketplaces," Papers 2112.09065, arXiv.org, revised Apr 2022.
    3. Xiang Hui & Meng Liu, 2022. "Quality Certificates Alleviate Consumer Aversion to Sponsored Search Advertising," CESifo Working Paper Series 9886, CESifo.
    4. Ciotti, Fabrizio & Hornuf, Lars & Stenzhorn, Eliza, 2021. "Lock-In Effects in Online Labor Markets," LIDAM Discussion Papers CORE 2021014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Zhong, Jiatong, 2022. "Reputation of Quality in International Trade: Evidence from Consumer Product Recalls," Working Papers 2022-8, University of Alberta, Department of Economics.
    6. Han, Xintong & Li, Yushen & Wang, Tong, 2023. "Peer recognition, badge policies, and content contribution: An empirical study," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 691-707.
    7. Yasui, Yuta, 2021. "Controlling Fake Reviews," MPRA Paper 108177, University Library of Munich, Germany.

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