A Comparison of Reputation, Certification, Warranties, and Information Disclosure as Remedies for Information Asymmetries: Lessons from the On-Line Comic Book Market

Abstract

Signaling strategies which sellers of high quality securities, goods, or services employ to differentiate their securities or products from those of lower quality include: (1) developing a reputation for high quality, (2) certification by a respected third party (e.g., underwriters, bond rating agencies, and auditors, for securities, and testing laboratories for goods), (3) warranties (for goods), and (4) information disclosure (such as financial statements for securities and specifications and test results for goods). These signaling strategies are compared using data from the online comic book auction market. This market has a number of important advantages: (1) the information asymmetry is substantial, (2) good measures of reputation are available, and (3) there are many sellers employing different combinations of the four strategies. Of the four strategies, we find certification by a respected third party sends the strongest signal. On average certified comics sell for over 50% more than otherwise equivalent uncertified comics. Moreover it appears that part of this price premium is due to risk reduction, i.e., not all is due to differences in the expected quality of certified and uncertified books. We find that both how positive or negative the seller's reputation is and how well established that reputation is significantly impact the price though reputation is less important than certification. We find no evidence that warranties in the form of money-back guarantees impact the price. Apparently buyers reason that sellers of truly high quality books should seek certification so discount the presence of both warranties and positive reputations. Virtually all sellers disclose information in the form of scans and failure to do so lowers the price a modest amount. Since for a single sale, the seller's reputation is exogenous while the other three strategies are endogenous, we explore how a seller's strategy choices depend on her reputation.

Keywords: reputation, certification, warranties, information asymmetry, signaling, auctions

JEL Classification: D82, D83, G14, D44