Working Paper: CEPR ID: DP4345
Authors: Lus M. B. Cabral; Ali Hortasu
Abstract: We propose a basic theoretical model of eBay?s reputation mechanism, derive a series of implications and empirically test their validity. Our theoretical model features both adverse selection and moral hazard. We show that when a seller receives a negative rating for the first time his reputation decreases and so does his effort level. This implies a decline in sales and sale price; and an increase in the rate of arrival of subsequent negative feedback. Our model also suggests that sellers with worse records are more likely to exit (and possibly re-enter under a new identity), whereas better sellers have more to gain from ?buying a reputation? by building up a record of favourable feedback through purchases rather than sales. Our empirical evidence, based on a panel dataset of seller feedback histories and cross-sectional data on transaction prices collected from eBay, is broadly consistent will all of these predictions. An important conclusion of our results is that eBay?s reputation system gives way to strategic responses from both buyers and sellers.
Keywords: Auctions; eBay; Moral Hazard; Quality; Reputation
JEL Codes: D44; L15; L86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| First negative feedback (Y70) | Decrease in reputation (Z13) |
| Decrease in reputation (Z13) | Decrease in effort level (D29) |
| Decrease in effort level (D29) | Decline in sales (L81) |
| Decline in sales (L81) | Decline in sale prices (R31) |
| First negative feedback (Y70) | Increase in rate of negative feedback arrival (C69) |
| Poor reputation (Y70) | Increased likelihood of seller exit (J26) |