Simple Reputation Systems

University of Copenhagen, Dept. of Economics Discussion Paper No. 05-21

22 Pages Posted: 15 Sep 2005

See all articles by John R. Kennes

John R. Kennes

Aarhus University - School of Business and Social Sciences

Aaron Schiff

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: November 2005

Abstract

This paper develops a model of simple 'reputation systems' that monitor and publish information about the behavior of sellers in a market with search frictions and asymmetric information. The reputations created by these systems influence the equilibrium search investments of buyers and thus provide for market-based 'punishment' of bad behavior. Our model allows us to determine the effects of the introduction of a reputation system on the behavior and welfare of buyers and sellers in such a market. We show that a simple reputation system that rewards honesty can enhance welfare by allowing good sellers to truthfully signal their type. However, we also show that the same reputation system can delay the creation of such information if bad sellers mimic the signalling strategy of good sellers. In this case, we show that an alternative simple reputation system that screens for type can be superior.

Keywords: reputation, asymmetric information, competing auctions

JEL Classification: D82, D83

Suggested Citation

Kennes, John Robert and Schiff, Aaron, Simple Reputation Systems (November 2005). University of Copenhagen, Dept. of Economics Discussion Paper No. 05-21, Available at SSRN: https://ssrn.com/abstract=799525 or http://dx.doi.org/10.2139/ssrn.799525

John Robert Kennes

Aarhus University - School of Business and Social Sciences ( email )

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