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The Dynamics of Seller Reputation: Theory and Evidence from eBay

  • Luís Cabral
  • Ali Hortacsu

We propose a basic theoretical model of eBay’s reputation mechanism, derive a series of implications and empirically test their validity. Our theoretical model features both adverse selection and moral hazard. We show that when a seller receives a negative rating for the first time his reputation decreases and so does his effort level. This implies a decline in sales and sale price; and an increase in the rate of arrival of subsequent negative feedback. Our model also suggests that sellers with worse records are more likely to exit (and possibly re-enter under a new identity), whereas better sellers have more to gain from ‘buying a reputation’ by building up a record of favourable feedback through purchases rather than sales. Our empirical evidence, based on a panel dataset of seller feedback histories and cross-sectional data on transaction prices collected from eBay, is broadly consistent will all of these predictions. An important conclusion of our results is that eBay’s reputation system gives way to strategic responses from both buyers and sellers.

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Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 04-05.

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Date of creation: 2004
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Handle: RePEc:ste:nystbu:04-05
Contact details of provider: Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/

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