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"How Effective Are Electronic Reputation Mechanisms? An Experimental Investigation"

Publication Title: How Effective Are Electronic Reputation Mechanisms? An Experimental Investigation
Author(s): Bolton, G., E. Katok, A. Ockenfels,

Year: 2004
Published in: Management Science, 50 (2004),

Topic of the Publication: - Business Strategy
- Economics
- Pricing
- Information Goods
- Paid Services
- Paid Content

Abstract:
Electronic reputation or “feedback” mechanisms aim to mitigate the moral hazard problems associated with
exchange among strangers by providing the type of information available in more traditional close-knit
groups, where members are frequently involved in one another’s dealings. In this paper, we compare trading in
a market with online feedback (as implemented by many Internet markets) to a market without feedback, as well
as to a market in which the same people interact with one another repeatedly (partners market). We find that
while the feedback mechanism induces quite a substantial improvement in transaction efficiency, it also exhibits
a kind of public goods problem in that, unlike in the partners market, the benefits of trust and trustworthy
behavior go to the whole community and are not completely internalized. We discuss the implications of this
perspective for improving feedback systems.
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