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Simple Reputation Systems

21 Pages Posted: 1 Jun 2007  

John R. Kennes

University of Aarhus - School of Economics and Management

Aaron Schiff

University of Auckland - Department of Economics

Multiple version iconThere are 2 versions of this paper

Abstract

We develop a model of simple "reputation systems" that monitor and publish information about the behavior of sellers in a search market with asymmetric information. The reputations created influence the equilibrium search patterns of buyers and thus provide for market-based "punishment" of bad behavior. We show that a reputation system that rewards honesty can enhance welfare by allowing good sellers to truthfully signal their type. However, the same system can be prone to strategic manipulation by sellers who always have low-quality products. In that case, we show that an alternative system which assigns reputations based on product quality rather than honesty can be superior.

Suggested Citation

Kennes, John R. and Schiff, Aaron, Simple Reputation Systems. Scandinavian Journal of Economics, Vol. 109, No. 1, pp. 71-91, March 2007. Available at SSRN: https://ssrn.com/abstract=990128 or http://dx.doi.org/10.1111/j.1467-9442.2007.00481.x

John Robert Kennes (Contact Author)

University of Aarhus - School of Economics and Management ( email )

Room 129, Building 1326
DK-8000 Aarhus C
Denmark
+45 8942 1974 (Phone)

HOME PAGE: http://econ.au.dk/about-us/people/faculty-vip/kennes-john-robert/

Aaron Schiff

University of Auckland - Department of Economics ( email )

Private Bag 92019
Auckland
New Zealand

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