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How Effective are Electronic Reputation Mechanisms? An Experimental Investigation

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  • Gary E. Bolton
  • Elena Katok
  • Axel Ockenfels

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, 2003. "How Effective are Electronic Reputation Mechanisms? An Experimental Investigation," Working Paper Series in Economics 3, University of Cologne, Department of Economics.
  • Handle: RePEc:kls:series:0003
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    References listed on IDEAS

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    Cited by:

    1. Patrick Bajari & Ali Hortaçsu, 2004. "Economic Insights from Internet Auctions," Journal of Economic Literature, American Economic Association, vol. 42(2), pages 457-486, June.
    2. Jordi Sabater-Mir & Mario Paolucci & Rosaria Conte, 2006. "Repage: REPutation and ImAGE Among Limited Autonomous Partners," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 9(2), pages 1-3.
    3. Michael R. Baye & John Morgan, 2005. "Red Queen Pricing Effects in E-Retail Markets," Working Papers 2005-07, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    4. Robert Kurzban & Mary Rigdon & Bart Wilson, 2008. "Incremental approaches to establishing trust," Experimental Economics, Springer;Economic Science Association, vol. 11(4), pages 370-389, December.
    5. Paul Resnick & Richard Zeckhauser & John Swanson & Kate Lockwood, 2006. "The value of reputation on eBay: A controlled experiment," Experimental Economics, Springer;Economic Science Association, vol. 9(2), pages 79-101, June.
    6. Toshio Yamagishi & Satoshi Kanazawa & Rie Mashima & Shigeru Terai, 2005. "Separating Trust from Cooperation in a Dynamic Relationship," Rationality and Society, , vol. 17(3), pages 275-308, August.

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