Efficiency and Robustness of Binary Feedback Mechanisms in Trading Environments with Moral Hazard
This paper offers a systematic exploration of online feedback mechanism design issues in trading environments with opportunistic sellers, imperfect monitoring of a seller's effort level, and two possible transaction outcomes (corresponding to "high" and "low" quality respectively), one of which has no value to buyers. The objective of feedback mechanisms in such settings is to induce sellers to exert high effort and, therefore, to maximize the probability of high quality outcomes. I study a practically significant family of mechanisms that resembles aspects of the one used by online auction house eBay. These feedback mechanisms solicit "binary" ratings of transaction outcomes as either positive or negative and publish the sums of ratings posted by buyers on a seller during the N most recent periods. My analysis finds that such "binary" feedback mechanisms can induce high average levels of cooperation that remain stable over time. Surprisingly, their efficiency cannot be improved by summarizing larger numbers of ratings or by publishing a seller's detailed feedback history. I further examine the robustness of these mechanisms to incorrect or incomplete feedback as well as to strategic changes of online identities. The theoretical outcomes predicted by this paper are consistent with empirical observations and offer theory-backed explanations to hitherto poorly understood phenomena such as the remarkably low fraction of negative feedback on eBa
|Date of creation:||14 Apr 2003|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mitsloan.mit.edu/
More information through EDIRC
|Order Information:|| Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- D. Fudenberg & D. K. Levine, 1994.
"Efficiency and Observability with Long-Run and Short-Run Players,"
Levine's Working Paper Archive
627, David K. Levine.
- Fudenberg Drew & Levine David K., 1994. "Efficiency and Observability with Long-Run and Short-Run Players," Journal of Economic Theory, Elsevier, vol. 62(1), pages 103-135, February.
- Fudenberg, D. & Levine, D.K., 1991. "Efficiency and Obsevability with Long-Run and Short-Run Players," Working papers 591, Massachusetts Institute of Technology (MIT), Department of Economics.
- Drew Fudenberg & David K Levine, 1999. "Efficiency and Observability with Long-Run and Short-Run Players," Levine's Working Paper Archive 81, David K. Levine.
- Levine, David & Fudenberg, Drew, 1994. "Efficiency and Observability with Long-Run and Short-Run Players," Scholarly Articles 3203774, Harvard University Department of Economics.
- Edward J Green & Robert H Porter, 1997.
"Noncooperative Collusion Under Imperfect Price Information,"
Levine's Working Paper Archive
1147, David K. Levine.
- Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
- Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers 367, California Institute of Technology, Division of the Humanities and Social Sciences.
- Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
- Chrysanthos Dellarocas, 2003. "The Digitization of Word of Mouth: Promise and Challenges of Online Feedback Mechanisms," Management Science, INFORMS, vol. 49(10), pages 1407-1424, October.
- Michihiro Kandori & Hitoshi Matsushima, 1998. "Private Observation, Communication and Collusion," Econometrica, Econometric Society, vol. 66(3), pages 627-652, May.
- Dellarocas, Chrysanthos, 2003. "The Digitization of Word-of-mouth: Promise and Challenges of Online Feedback Mechanisms," Working papers 4296-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Miller, Nolan & Resnick, Paul & Zeckhauser, Richard, 2002. "Eliciting Honest Feedback in Electronic Markets," Working Paper Series rwp02-039, Harvard University, John F. Kennedy School of Government.
- Paul Resnick & Richard Zeckhauser & John Swanson & Kate Lockwood, 2006.
"The value of reputation on eBay: A controlled experiment,"
Springer, vol. 9(2), pages 79-101, June.
- Resnick, Paul & Zeckhauser, Richard & Swanson, John & Lockwood, Kate, 2003. "The Value of Reputation on eBay: A Controlled Experiment," Working Paper Series rwp03-007, Harvard University, John F. Kennedy School of Government.
- Eric J. Friedman* & Paul Resnick, 2001. "The Social Cost of Cheap Pseudonyms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(2), pages 173-199, 06.
- Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
When requesting a correction, please mention this item's handle: RePEc:mit:sloanp:1852. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.