Reputation and Adverse Selection, Theory and Evidence from eBay

70 Pages Posted: 10 Jul 2012 Last revised: 6 Jun 2014

See all articles by Maryam Saeedi

Maryam Saeedi

Carnegie Mellon University - David A. Tepper School of Business

Date Written: 2014

Abstract

How can actors in a marketplace introduce mechanisms to overcome possible inefficiencies caused by adverse selection? Using a unique dataset that follows sellers on eBay over time, I show that reputation is a major determinant of variations in price. I develop a model of firm dynamics where firms have heterogeneous qualities unobservable by consumers. Reputation is used as a signal of private information. I structurally estimate the model to uncover buyers' utility and sellers' costs and qualities. Removing the reputation mechanism increases low-quality sellers' marketshare, lowers prices, and consequently reduces the market size by 61% and consumer surplus by 48%.

Keywords: Reputation, Adverse Selection, eBay

Suggested Citation

Saeedi, Maryam, Reputation and Adverse Selection, Theory and Evidence from eBay (2014). Available at SSRN: https://ssrn.com/abstract=2102948 or http://dx.doi.org/10.2139/ssrn.2102948

Maryam Saeedi (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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