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Adverse Selection and Moral Hazard in Anonymous Markets

  • Klein, Tobias
  • Lambertz, Christian
  • Stahl, Konrad

We study the effects of improvements in eBay's rating mechanism on seller exit and continuing sellers' behavior. Following a large sample of sellers over time, we exploit the fact that the rating mechanism was changed to reduce strategic bias in buyer rating. That improvement did not lead to increased exit of poorly rated sellers. Yet, buyer valuation of the staying sellers – especially the poorly rated ones – improved significantly. By our preferred interpretation, the latter effect results from increased seller effort; also, when sellers have the choice between exiting (a reduction in adverse selection) and improved behavior (a reduction in moral hazard), then they prefer the latter because of lower cost.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9501.

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Date of creation: Jun 2013
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Handle: RePEc:cpr:ceprdp:9501
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  1. Aviva Aron-Dine & Liran Einav & Amy Finkelstein & Mark Cullen, 2012. "Moral hazard in health insurance: How important is forward looking behavior?," Discussion Papers 11-007, Stanford Institute for Economic Policy Research.
  2. Michael Anderson & Jeremy Magruder, 2012. "Learning from the Crowd: Regression Discontinuity Estimates of the Effects of an Online Review Database," Economic Journal, Royal Economic Society, vol. 122(563), pages 957-989, 09.
  3. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  4. Andrew Kato & Ginger Jin, 2004. "Dividing online and offline: A case study," Natural Field Experiments 00276, The Field Experiments Website.
  5. Jeffrey A. Livingston, 2005. "How Valuable Is a Good Reputation? A Sample Selection Model of Internet Auctions," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 453-465, August.
  6. Jaap H. Abbring & Pierre-Andre Chiappori, 2004. "Moral Hazard and Dynamic Insurance Data," 2004 Meeting Papers 316, Society for Economic Dynamics.
  7. Klein, Tobias J. & Lambertz, Christian & Spagnolo, Giancarlo & Stahl, Konrad O., 2006. "Last Minute Feedback," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 62, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  8. Chrysanthos Dellarocas & Charles A. Wood, 2008. "The Sound of Silence in Online Feedback: Estimating Trading Risks in the Presence of Reporting Bias," Management Science, INFORMS, vol. 54(3), pages 460-476, March.
  9. Liran Einav & Amy Finkelstein & Stephen P. Ryan & Paul Schrimpf & Mark R. Cullen, 2013. "Selection on Moral Hazard in Health Insurance," American Economic Review, American Economic Association, vol. 103(1), pages 178-219, February.
  10. David Dranove & Ginger Zhe Jin, 2010. "Quality Disclosure and Certification: Theory and Practice," NBER Working Papers 15644, National Bureau of Economic Research, Inc.
  11. Amy Finkelstein & James Poterba, 2000. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," NBER Working Papers 8045, National Bureau of Economic Research, Inc.
  12. 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.
  13. Patrick Bajari & Han Hong & Ahmed Khwaja, 2006. "Moral Hazard, Adverse Selection and Health Expenditures: A Semiparametric Analysis," NBER Working Papers 12445, National Bureau of Economic Research, Inc.
  14. Melnik, Mikhail I & Alm, James, 2002. "Does a Seller's Ecommerce Reputation Matter? Evidence from eBay Auctions," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 337-49, September.
  15. Jaap H. Abbring & James J. Heckman & Pierre-André Chiappori & Jean Pinquet, 2003. "Adverse Selection and Moral Hazard In Insurance: Can Dynamic Data Help to Distinguish?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 512-521, 04/05.
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