The Value of a Reputation System
This paper explores the trade-off between the short-term benefits of false quality advertisements against the longer term costs of reputation damage. A directed search model is constructed in which submarkets are created by the advertisements and reputations of sellers. A reputation system links misleading advertisements in the present period to a lower reputation in the next period. We show that a reputation system always increases the prices of high quality products and directs search more accurately towards the sellers with such products. We also show that buyers are hurt by a reputation system if the market is thin -- has few sellers -- because the equilibrium increase in prices is greater than the equilibrium increase in the quality of trade. Finally, we show that a reputation system which screens for honesty increases social welfare by making sellers more truthful. However, we also show that a reputation for honesty is not always highly valued and that an alternative reputation system which screens for type can be more effective.
|Date of creation:||23 Jan 2003|
|Date of revision:|
|Note:||Type of Document - PDF; prepared on IBM PC - PC-TEX; to print on Any; pages: 31 ; figures: included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
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.:
- Coles, Melvyn G. & Eeckhout, Jan, 2003. "Indeterminacy and directed search," Journal of Economic Theory, Elsevier, vol. 111(2), pages 265-276, August.
- Kultti, Klaus, 1999.
"Equivalence of Auctions and Posted Prices,"
Games and Economic Behavior,
Elsevier, vol. 27(1), pages 106-113, April.
- King, Ian & Kennes, John & Julien, Benoit, 2001.
"Residual Wage Disparity in Directed Search Equilibrium,"
209, Department of Economics, The University of Auckland.
- John Kennes & Ian Paul King & Benoit Julien, 2002. "'Residual' Wage Disparity in Directed Search Equilibrium," Macroeconomics 0205003, EconWPA.
- Glenn Ellison, 1994. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 567-588.
- Douglas W. Diamond, 1998.
"Reputation Acquisition in Debt Markets,"
Levine's Working Paper Archive
602, David K. Levine.
- Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
- Benoît Julien & John Kennes & Ian King, 2002.
"Auctions Beat Posted Prices in a Small Market,"
Journal of Institutional and Theoretical Economics (JITE),
Mohr Siebeck, Tübingen, vol. 158(4), pages 548-, December.
- Julien, B. & Kennes, J. & King, I., 1998.
"Bidding for Labour,"
dp98-03, Department of Economics, Simon Fraser University.
- Julien, Benoit & Kennes, John & King, Ian, 2006.
"The Mortensen rule and efficient coordination unemployment,"
Elsevier, vol. 90(2), pages 149-155, February.
- Julien, Benoit & Kennes, John & King, Ian, 2002. "The Mortensen Rule and Efficient Coordination Unemployment," Working Papers 214, Department of Economics, The University of Auckland.
- John Kennes & Benoit Julien & Ian King, 2002. "The Mortensen Rule and Efficient Coordination Unemployment," Macroeconomics 0206001, EconWPA.
- Kreps, David M. & Wilson, Robert, 1982.
"Reputation and imperfect information,"
Journal of Economic Theory,
Elsevier, vol. 27(2), pages 253-279, August.
- Moen, Espen R, 1997.
"Competitive Search Equilibrium,"
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 385-411, April.
- George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
- McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
- Drew Fudenberg & David M. Kreps, 1987. "Reputation in the Simultaneous Play of Multiple Opponents," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 541-568.
- Asher Wolinsky, 1988. "Dynamic Markets with Competitive Bidding," Review of Economic Studies, Oxford University Press, vol. 55(1), pages 71-84.
- McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
- Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
- George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpio:0301011. 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: (EconWPA)
If references are entirely missing, you can add them using this form.