Reputation in Online Service Marketplaces: Empirical Evidence from a Transactional Dataset

Abstract:     
Online service marketplaces allow service buyers to post their project requests and service providers to bid for them. In order to reduce the transactional risks, marketplaces typically track and publish previous seller performance as a numerical reputation score. By analyzing a detailed transactional dataset with more than 1,800,000 bids corresponding to 270,000 projects posted between 2001 and 2010 in a leading online intermediary for software development services, we empirically study the effects of reputation on market outcomes. We find that buyers trade off reputation and price and are willing to accept higher bids posted by more reputable bidders. Sellers increase their bids with their reputation score, but primarily use a superior reputation to increase their probability of being selected as opposed to increasing their price. We study how various variables moderate the importance of the reputation score: we observe that the reputation score has a smaller effect in situations where there exists a previous relationship between buyer and seller, when the seller has certified his or her skills, when the seller is local, or in situations that prompt higher interpersonal trust. Furthermore, we discuss the effect of information related to reputation about the seller beyond the observed reputation score and conclude that the reputation score provides a good summary of all the reputational information available to the buyers.

Number of Pages in PDF File: 32

Keywords: online service markets, online labor markets, reputation, service procurement, procurement auctions

JEL Classification: L86, D82, D83

working papers series