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http://ssrn.com/abstract=393041
 
 

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Cooperation Without Enforcement? A Comparative Analysis of Litigation and Online Reputation as Quality Assurance Mechanisms


Yannis Bakos


New York University (NYU) - Department of Information, Operations, and Management Sciences

Chrysanthos Dellarocas


Boston University - Department of Management Information Systems

March 1, 2003

MIT Sloan Working Paper No. 4295-03

Abstract:     
Commerce depends on buyers and sellers fulfilling their contractual obligations; mechanisms inducing such performance are essential to well functioning markets. Internet-enabled reputation mechanisms that collect and disseminate consumer feedback have emerged as prominent means for inducing seller performance in online and offline markets. This article compares the ability of reputation and more traditional litigation-like mechanisms for dispute resolution to induce efficient economic outcomes. We use a game theoretic formulation and derive results for their relative efficiency and effectiveness individually or as complements. We find that the popular view of reputation as an efficient and relatively costless way to induce seller effort under all circumstances is incorrect; reputation is less efficient than litigation in inducing any given level of effort. Thus reputation improves efficiency only in settings where the high cost of litigation, insufficient damage levels or low court accuracy induce sub-optimal effort or cause market failure. When adverse selection is important, reputation helps reveal the true types of market participants, which may offset its higher cost of inducing effort. Finally, adding reputation to existing litigation mechanisms increases seller effort and may require adjusting damage awards to avoid inducing over-effort.

Number of Pages in PDF File: 39

Keywords: Online Reputation Mechanisms, Dispute Resolution, Litigation, Internet, Game Theory, E-commerce, Information Technology

JEL Classification: C7, D8, K13, K4, L14

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Date posted: April 8, 2003 ; Last revised: May 27, 2014

Suggested Citation

Bakos, Yannis and Dellarocas, Chrysanthos, Cooperation Without Enforcement? A Comparative Analysis of Litigation and Online Reputation as Quality Assurance Mechanisms (March 1, 2003). MIT Sloan Working Paper No. 4295-03. Available at SSRN: http://ssrn.com/abstract=393041 or http://dx.doi.org/10.2139/ssrn.393041

Contact Information

Yannis Bakos
New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )
44 West Fourth Street
New York, NY 10012
United States
212-998-0841 (Phone)
HOME PAGE: http://www.stern.nyu.edu/~bakos
Chrysanthos N. Dellarocas (Contact Author)
Boston University - Department of Management Information Systems ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
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