Money Talks: Rebate Mechanisms in Reputation System Design
Management Science (Forthcoming)
37 Pages Posted: 3 May 2010 Last revised: 29 Sep 2014
Date Written: August 1, 2013
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: Suggested Citation