More Trusting, Less Trust? An Investigation of Early E-Commerce in China

46 Pages Posted: 13 Apr 2013 Last revised: 24 Apr 2022

See all articles by Hongbin Cai

Hongbin Cai

Peking University - Guanghua School of Management

Ginger Zhe Jin

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER)

Chong Liu

Peking University

Li-An Zhou

Peking University - Guanghua School of Management

Date Written: April 2013

Abstract

Trust is vital for market development, but how can trust be enhanced in a marketplace? A common view is that more trusting may help to build trust, especially in less developed economies. In this paper, we argue that more trusting may lead to less trust. We set up a rational expectation model in which a marketplace uses buyer protection to promote buyer trusting. Our results show that buyer protection may reduce trust in equilibrium and even hinder market expansion because it triggers differential entry between honest and strategic sellers and may induce more cheating from strategic sellers. Using a large transaction-level data set from the early years of Eachnet.com (an eBay equivalent in China), we find evidence that is consistent with the model predictions. Stronger buyer protection leads to less favorable evaluation of seller behavior and is associated with slower market expansion. These findings suggest that a trust-promoting policy aiming at buyer trusting may not be effective if it is not accompanied by additional incentives to improve seller trustworthiness.

Suggested Citation

Cai, Hongbin and Jin, Ginger Zhe and Liu, Chong and Zhou, Li-An, More Trusting, Less Trust? An Investigation of Early E-Commerce in China (April 2013). NBER Working Paper No. w18961, Available at SSRN: https://ssrn.com/abstract=2250270

Hongbin Cai (Contact Author)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Ginger Zhe Jin

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-3484 (Phone)
301-405-3542 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Chong Liu

Peking University ( email )

Li-An Zhou

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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