How Effective are Online Reputation Mechanisms? An Experimental Study

Management Science, Vol. 50, No. 11, pp. 1587-1602, November 2004

Posted: 28 Mar 2005

See all articles by Gary E. Bolton

Gary E. Bolton

Pennsylvania State University - Department of Supply Chain & Information Systems

Elena Katok

University of Texas at Dallas

Axel Ockenfels

University of Cologne - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

Electronic reputation or feedback mechanisms aim to mitigate the moral hazard problems associated with exchange among strangers by providing the type of information available in more traditional close-knit groups, where members are frequently involved in one another's dealings. In this paper, we compare trading in a market with online feedback (as implemented by many Internet markets) to a market without feedback, as well as to a market in which the same people interact with one another repeatedly (partners market). We find that while the feedback mechanism induces quite a substantial improvement in transaction efficiency, it also exhibits a kind of public goods problem in that, unlike in the partners market, the benefits of trust and trustworthy behavior go to the whole community and are not completely internalized. We discuss the implications of this perspective for improving feedback systems.

Keywords: trust; reputation, reciprocity, electronic markets

JEL Classification: C7, C91, L14

Suggested Citation

Bolton, Gary Eugene and Katok, Elena and Ockenfels, Axel, How Effective are Online Reputation Mechanisms? An Experimental Study. Management Science, Vol. 50, No. 11, pp. 1587-1602, November 2004, Available at SSRN: https://ssrn.com/abstract=673506

Gary Eugene Bolton

Pennsylvania State University - Department of Supply Chain & Information Systems ( email )

Dept. of Supply Chain & Information Systems
University Park, PA 16802-3306
United States
814-865-0611 (Phone)
814-863-2381 (Fax)

Elena Katok (Contact Author)

University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Dr.
Richardson, TX 75080
United States

HOME PAGE: http://www.utdallas.edu/~ekatok/

Axel Ockenfels

University of Cologne - Department of Economics ( email )

Albertus Magnus Platz
Cologne 50923
Germany

HOME PAGE: http://ockenfels.uni-koeln.de/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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