Reputation Mechanism Design in Online Trading Environments with Pure Moral Hazard

Chrysanthos N. Dellarocas

281 citations0/0 files storedInformation Systems Research

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Auction Theory and Applications Game Theory and Applications Digital Platforms and Economics

Abstract

This paper offers a systematic exploration of reputation mechanism design in trading environments with opportunistic sellers of commonly known cost and ability parameters, imperfect monitoring of a seller's actions, and two possible seller effort levels, one of which has no value to buyers. The objective of reputation mechanisms in such pure moral hazard settings is to induce sellers to exert high effort as often as possible. I study the impact of various mechanism parameters (such as the granularity of solicited feedback, the format of the public reputation profile, the policy regarding missing feedback, and the rules for admitting new sellers) on the resulting market efficiency. I find that maximum efficiency is bounded away from the hypothetical first-best case where sellers can credibly precommit to full cooperation by a factor that is related to the probability that cooperating sellers may receive “unfair” bad ratings. Furthermore, maximum efficiency is independent of the length of past history summarized in a seller's public reputation profile. I apply my framework to a simplified model of eBay's feedback mechanism and conclude that, in pure moral hazard settings, eBay's simple mechanism is capable of inducing the maximum theoretical efficiency independently of the number of recent ratings that are being summarized in a seller's profile. I derive optimal policies for dealing with missing feedback and easy online identity changes. Finally, I show that if the number of buyers is large, the results obtained in the monopoly case are also approximately valid in settings where multiple sellers of different reputations simultaneously offer auctions for identical goods.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 281 citations exist upstream.

References

1981The Role of Market Forces in Assuring Contractual Performance 2003The Digitization of Word of Mouth: Promise and Challenges of Online Feedback Mechanisms 1983Premiums for High Quality Products as Returns to Reputations 1993Contract enforceability and economic institutions in early trade: The Maghribi Traders' Coalition 2000Reputation systems 1998Customer Satisfaction and Word of Mouth 1984Noncooperative Collusion under Imperfect Price Information 2004Trust among strangers in internet transactions: Empirical analysis of eBay' s reputation system

Cited by

2018Social norm complexity and past reputations in the evolution of cooperation 2009How can virtual communities create value for business?2012Laying off credit risk: Loan sales versus credit default swaps 2014Social media for openness and accountability in the public sector: Cases in the Greek context 2006Reputation in Online Auctions: The Market for Trust 2008

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.