Reputation and adverse selection: theory and evidence from eBay

Maryam Saeedi

RAND Journal of Economics, 2019, vol. 50, issue 4, 822-853

Abstract: How can a marketplace introduce mechanisms to overcome inefficiencies caused by adverse selection? In this article, I use a unique data set that follows eBay sellers to show that reputation is a major determinant of price variations. I develop a model of sellers' dynamic behavior where sellers have heterogeneous qualities unobservable by buyers. Using reputation as a signal of quality, I structurally estimate the model to uncover buyers' utility and sellers' costs and underlying qualities. I show that removing the reputation mechanism increases low‐quality sellers' market share, lowers prices, and consequently reduces sellers' profit by 66% and consumer surplus by 35%.

Date: 2019
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https://doi.org/10.1111/1756-2171.12297

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