How Social Reputation Networks Interact with Competition in Anonymous Online Trading: An Experimental Study

Many Internet markets rely on ‘feedback systems’, essentially social networks of reputation, to facilitate trust and trustworthiness in anonymous transactions. Market competition creates incentives that arguably may enhance or curb the effectiveness of these systems. We investigate how different forms of market competition and social reputation networks interact in a series of laboratory online markets, where sellers face a moral hazard. We find that competition in strangers networks (where market encounters are one-shot) most frequently enhances trust and trustworthiness, and always increases total gains-from-trade. One reason is that information about reputation trumps pricing in the sense that traders usually do not conduct business with someone having a bad reputation not even for a substantial price discount. We also find that a reliable reputation network can largely reduce the advantage of partners networks (where a buyer and a seller can maintain repeated exchange with each other) in promoting trust and trustworthiness if the market is sufficiently competitive. We conclude that, overall, competitive online markets have more effective social reputation networks.reputation systems, e-commerce, internet markets, trust

Two-sided reputation in certification markets

We consider a market where privately informed sellers resort to certification to overcome adverse selection. There is uncertainty about the certifier's ability to generate accurate information. The profit of a monopolistic certifier is an inverted U-shaped function of his reputation for accuracy: being perceived as more precise allows to attract more good sellers but a high expected precision also deters bad sellers. Since the certifier tries to reach a balanced reputation to attract both types, reputation has a disciplining effect when the certifier is perceived as insufficiently accurate, but gives incentives to decrease precision when he is perceived as “too" accurate. The impact of competition depends on whether sellers “multihome" or “singlehome". Under singlehoming, certifiers compete to attract good sellers, which makes higher reputation more valuable. Multihoming makes higher reputations less desirable because the competitor exerts a negative externality by providing extra information. Therefore, singlehoming attenuates bad reputation effects, while multihoming exacerbates inefficiencies

Reputation and Certification in Online Shops

We investigate the impact of self-organized reputation versus certification by an independent institution on demand for online shops. Using data from a large Austrian price comparison site, we show that quality seals issued by a credible and independent institution increase demand more than feedback-based reputation. This result is important for markets where the market-maker must deal with issues of asymmetric information concerning the quality of goods and services in the market.Online markets, search engines, signaling, certification, reputation

Small firms, borrowing constraints, and reputation.

This paper presents a simple model relating firm age with firm size and access to credit markets. Lending to new firms is risky because lenders have had no time to accumulate observations about them. As a result, interest rates are high and loans are small for entering firms. As firms need credit to operate, credit markets impose a limit on the scale of operation of new firms. Reputation building by the firms allows markets to overcome these difficulties over time. Large firms face lower interest rates than small firms, and credit markets fluctuations are shown to have different effects on firms of different size.Small Firms; Credit Markets; Borrowing Constraints; Repeated Games; Reputation;

Reputation and Credit Market Formation: How Relational Incentives and Legal Contract Enforcement Interact

The evidence suggests that relational contracting and legal rules play an important role in credit markets but on the basis of the prevailing field data it is difficult to pin down their causal impact. Here we show experimentally that relational incentives are a powerful causal determinant for the existence and performance of credit markets. In fact, in the absence of legal enforcement and reputation formation opportunities the credit market breaks down almost completely while if reputation formation is possible a stable credit market emerges even in the absence of legal enforcement of debt repayment. Introducing legal enforcement of repayments causes a further significant increase in credit market trading but has only a surprisingly small impact on overall efficiency. The reason is that legal enforcement of debt repayments weakens relational incentives and exacerbates another moral hazard problem in credit markets – the choice of inefficient high-risk projects.credit markets, relationship lending, reputation formation, legal enforcement

Group reputations: an experimental foray

Often information structures are such that while individual reputation building is impossible groups of agents would have the opportunity of building up a reputation. We experimentally examine whether groups of sellers in markets that suffer from moral hazard are able to build up reputations and, thus, avoid market breakdown. We contrast our findings with situations where sellers alternatively can build up an individual reputation or where there are no possibilities for reputation building at all. Our results offer a rather optimistic outlook on group reputations. Even though sellers only receive some of the reputation benefits of withstanding short-run incentives to exploit trust, they are able to overcome the dilemma and successfully exploit the information structure

Bargaining and Reputation in Search Markets

In a two-sided search market agents are paired to bargain over a unit surplus. The matching market serves as an endogenous outside option for agents in a bargaining relationship. Behavioral agents are (strategically inflexible) commitment types that demand a constant portion of the unit surplus. The steady state frequency of behavioral types in the market is determined in equilibrium. We show, even if behavioral types are negligible, they substantially effect the terms of trade and efficiency. In an unbalanced market where the entering flow of one side is short, bargaining follows equilibrium play in a bargaining game with one-sided reputation, the terms of trade are determined by the commitment types on the short side, and commitment types improve efficiency. In a balanced market where the entering flows of the two sides are equal, bargaining follows equilibrium play in a bargaining game with two-sided reputation and commitment types cause inefficiency. An inefficient equilibrium with persistent delays and break-ups is constructed. The magnitude of inefficiency is determined by the inflexible demands of the commitment types and is independent of the fraction of the commitment types entering the market.Bargaining, Reputation, Search, Dynamic Matching, War-of-Attrition. JEL Classification Numbers: C78, D83