Working Paper: NBER ID: w11616
Authors: John A. List
Abstract: The role of the market in mitigating and mediating various forms of behavior is perhaps the central issue facing behavioral economics today. This study designs a field experiment that is explicitly linked to a controlled laboratory experiment to examine whether, and to what extent, social preferences influence outcomes in actual market transactions. While agents drawn from a well-functioning marketplace behave in accord with social preference models in tightly controlled laboratory experiments, when observed in their naturally occurring settings their behavior approaches what is predicted by self-interest theory. In the limit, much of the observed behavior in the marketplace that is consistent with social preferences is due to reputational concerns: suppliers who expect to have future interactions with buyers provide higher product quality only when the buyer can verify quality via a third-party certifier. The data also speak to theories of how reputation effects enhance market performance. In particular, reputation and the monitoring of quality are found to be complements, and findings suggest that the private market can solve the lemons problem through third party verification.
Keywords: No keywords provided
JEL Codes: C93; D63; D64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reputation effects enhance market performance (G14) | Reputation and quality monitoring are complementary (L15) |
| Absence of third-party verification (D82) | Both local and nonlocal dealers behave in line with self-interest theory (C70) |
| Local dealers exhibit a positive relationship between price offers and quality provided (L15) | Reputation effects are significant among local dealers (L14) |
| Observed reciprocal behaviors among local dealers (L14) | Attributed to social preferences (D91) |
| Local dealers providing higher product quality when buyers can verify quality through third-party certifiers (L15) | Reputation effects enhance market performance (G14) |