Simple Reputation Systems
John R. Kennes
University of Aarhus - School of Economics and Management
University of Auckland - Department of Economics
Scandinavian Journal of Economics, Vol. 109, No. 1, pp. 71-91, March 2007
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.
Number of Pages in PDF File: 21
Date posted: June 1, 2007