Working Paper: NBER ID: w10363
Authors: Lus 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 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 favorable feedback through purchases rather than sales. Our empirical evidence, based on a panel data set of seller feedback histories and cross-sectional data on transaction prices collected from eBay is broadly consistent with 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: No keywords provided
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 |
|---|---|
| negative rating (Y70) | seller reputation (L14) |
| seller reputation (L14) | effort level (D29) |
| effort level (D29) | sales (M31) |
| effort level (D29) | prices (P22) |
| effort level (D29) | subsequent negative feedback (G41) |
| first negative rating (Y70) | seller reputation (L14) |
| first negative rating (Y70) | effort level (D29) |
| first negative rating (Y70) | sales (M31) |
| first negative rating (Y70) | prices (P22) |
| 1% increase in negative feedback (C29) | sale price (D49) |
| worse reputations (Y70) | likelihood of seller exit (D43) |
| longer transaction records (C41) | exit probabilities (C62) |
| starting as buyers (M13) | negative feedback (D80) |