Money Talks: Rebate Mechanisms in Reputation System Design

Management Science (Forthcoming)

37 Pages Posted: 3 May 2010 Last revised: 29 Sep 2014

See all articles by Lingfang (Ivy) Li

Lingfang (Ivy) Li

Shanghai University of Finance and Economics

Erte Xiao

Monash University

Date Written: August 1, 2013

Abstract

Reputation systems that rely on voluntary feedback from traders are important in creating and sustaining trust in markets. Feedback nevertheless is a public good, and providing it is often costly. We combine theory with a laboratory experiment to study the effect of a seller precommitment mechanism: Sellers have an option to commit by providing a rebate to reduce the buyer’s feedback reporting cost before making purchasing decisions. Our theory predicts that this mechanism induces noncooperative sellers to cooperate in the listed-price market. Using a buyer-seller trust game with a unilateral feedback scheme, we find that the seller’s rebate decision has a significant impact on the buyer’s purchasing decision via signaling the seller’s cooperative type. More importantly, market efficiency under the precommitment mechanism increases with the probability that sellers will provide a rebate. Compared with the no rebate mechanism market, more efficient trades can be achieved when the sellers offer a rebate to the buyers in the market with the rebate mechanism, even when the rebate does not cover the full cost of feedback reporting.

Keywords: reputation, trust, feedback mechanism, asymmetric information, public good, experimental economics

JEL Classification: C91, D82, L86, H41

Suggested Citation

Li, Lingfang (Ivy) and Xiao, Erte, Money Talks: Rebate Mechanisms in Reputation System Design (August 1, 2013). Management Science (Forthcoming). Available at SSRN: https://ssrn.com/abstract=1597764 or http://dx.doi.org/10.2139/ssrn.1597764

Lingfang (Ivy) Li (Contact Author)

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

HOME PAGE: http://www.ivy-li.net

Erte Xiao

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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