Simple Reputation Systems

John Kennes () and Aaron Schiff ()

Scandinavian Journal of Economics, 2007, vol. 109, issue 1, pages 71-91

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. Copyright The editors of the "Scandinavian Journal of Economics" 2007 .

Date: 2007

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Working Paper: Simple Reputation Systems (2005)
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