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How Effective are Electronic Reputation Mechanisms?

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 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 mechanisms.

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File URL: http://lema.smeal.psu.edu/lema/papers/BKOeReputation.pdf
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File Function: First version, 2003
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Paper provided by The Pennsylvania State University, Laboratory for Economic Mangement and Auctions in its series Working Papers with number gb1.

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Length: 36 pages
Date of creation: 01 Aug 2003
Date of revision: 01 Aug 2003
Handle: RePEc:lma:wpaper:gb1
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Web page: http://lema.smeal.psu.edu

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