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Money Talks? An Experimental Study of Rebate in Reputation System Design

  • Li, Lingfang (Ivy)
  • Xiao, Erte

Reputation systems that rely on feedback from traders are important institutions for helping sustain trust in markets, while feedback information is usually considered a public good. We apply both theoretical models and experiments to study how raters' feedback behavior responds to different reporting costs and how to improve market efficiency by introducing a pre-commitment device for sellers in reputation systems. In particular, the pre-commitment device we study here allows sellers to provide rebates to cover buyers' reporting costs before buyers make purchasing decisions. Using a buyer-seller trust game with a unilateral feedback scheme, we find that a buyer’s propensity to leave feedback is more sensitive to reporting costs when the seller cooperates than when the seller defects. The seller’s decision on whether to provide a rebate significantly affects the buyer’s decision to leave feedback by compensating for the feedback costs. More importantly, the rebate decision has a significant impact on the buyer's purchasing decision via signaling the seller's cooperative type. The experimental results show that the rebate mechanism improves the market efficiency.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22401.

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Date of creation: 29 Apr 2010
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Handle: RePEc:pra:mprapa:22401
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  1. Offerman, Theo, 2002. "Hurting hurts more than helping helps," European Economic Review, Elsevier, vol. 46(8), pages 1423-1437, September.
  2. 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.
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  5. 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.
  6. 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.
  7. Douglas W. Diamond, 1998. "Reputation Acquisition in Debt Markets," Levine's Working Paper Archive 602, David K. Levine.
  8. Omar Al-Ubaydli & Min Sok Lee, 2008. "An Experimental Study of Asymmetric Reciprocity," Working Papers 1006, George Mason University, Interdisciplinary Center for Economic Science, revised Jul 2008.
  9. Luís Cabral & Ali Hortacsu, 2004. "The Dynamics of Seller Reputation: Theory and Evidence from eBay," Working Papers 04-05, New York University, Leonard N. Stern School of Business, Department of Economics.
  10. Simon Gachter & Ernst Fehr, 2000. "Cooperation and Punishment in Public Goods Experiments," American Economic Review, American Economic Association, vol. 90(4), pages 980-994, September.
  11. Bolton, Gary E. & Katok, Elena & Ockenfels, Axel, 2005. "Cooperation among strangers with limited information about reputation," Journal of Public Economics, Elsevier, vol. 89(8), pages 1457-1468, August.
  12. Erte Xiao & Daniel Houser, 2005. "Emotion expression in human punishment behavior," Experimental 0504003, EconWPA, revised 18 May 2005.
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  14. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  15. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  16. 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.
  17. 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.
  18. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 659-679.
  19. Brandts, J. & Figueras, N., 1997. "An Exploration of Reputation Formation in Experimental Games," UFAE and IAE Working Papers 404.97, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  20. Brit Grosskopf & Rajiv Sarin, 2010. "Is Reputation Good or Bad? An Experiment," American Economic Review, American Economic Association, vol. 100(5), pages 2187-2204, December.
  21. 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.
  22. Ginger Zhe Jin & Andrew Kato, 2006. "Price, quality, and reputation: evidence from an online field experiment," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 983-1005, December.
  23. David Masclet & Thierry Pénard, 2008. "Is the ebay feedback system really efficient ? an experimental study," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 200803, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  24. Patrick Bajari & Ali Horta�su, 2004. "Economic Insights from Internet Auctions," Journal of Economic Literature, American Economic Association, vol. 42(2), pages 457-486, June.
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