Efficiency and Robustnness of Ebay-like Online Feedback Mechanisms in Environments With Moral Hazard

Chris Dellarocas
Associate Professor of Management, MIT Sloan School

eBusiness Research Seminars
NE20-336 (3 Cambridge Center)
Wednesday, February 26, 11:30 PM-1:00 PM
Refreshments Provided

Abstract

Online reputation mechanisms are emerging as a promising approach for building trust and inducing cooperation in online trading environments where more established methods of social control (such as state regulation or the threat of litigation) are often difficult or too costly to implement. This paper offers a systematic exploration of online reputation mechanism design issues in trading environments with imperfect monitoring of a seller’s effort level and two possible qualities. The objective of reputation mechanisms in such settings is to induce sellers to exert high effort. I study a practically significant family of mechanisms that resemble the one used by online auction house eBay. These eBay-like feedback mechanisms solicit ratings of transaction outcomes as either positive or negative and publish the sums of positive and negative ratings posted by buyers on a seller during the N most recent periods. I find that eBay-like mechanisms can induce high average levels of cooperation that remain stable over time. Surprisingly, their efficiency cannot be improved by summarizing larger numbers of ratings or by publishing a seller’s detailed feedback history. They are quite robust to incomplete feedback submission and can be made robust to sellers that can costlessly change identities by setting the initial feedback profile of new players so that it corresponds to the “worst” possible reputation. The theoretical outcomes predicted by this paper are consistent with empirical observations and offer new, theory-backed, explanations to hitherto poorly understood phenomena such as the remarkably low fraction of negative feedback on eBay. Finally, they provide concrete suggestions on how eBay’s current mechanism can be improved.

Calendar for Spring 2003 Research seminars