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How Effective Are Electronic Reputation Mechanisms? An Experimental Investigation

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  • Gary E. Bolton

    (Smeal College of Business, Pennsylvania State University, State College, Pennsylvania 16870, and Harvard Business School, Boston, Massachusetts 02163)

  • Elena Katok

    (Smeal College of Business, Pennsylvania State University, State College, Pennsylvania 16870, and Harvard Business School, Boston, Massachusetts 02163)

  • Axel Ockenfels

    (Department of Economics, University of Cologne, Cologne, Germany)

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.

Suggested Citation

  • Gary E. Bolton & Elena Katok & Axel Ockenfels, 2004. "How Effective Are Electronic Reputation Mechanisms? An Experimental Investigation," Management Science, INFORMS, vol. 50(11), pages 1587-1602, November.
    • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:11:p:1587-1602
    DOI: 10.1287/mnsc.1030.0199
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    References listed on IDEAS

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