Bad reputation with simple rating systems

Caio Lorecchio and Daniel Monte

Games and Economic Behavior, 2023, vol. 142, issue C, 150-178

Abstract: We consider information censoring through finite memory as a device against bad reputational concerns. Our class of constrained information policies resembles common practices in online reputation systems, on which customers increasingly rely whenever hiring experts. In a world of repeated interactions between a long-lived expert and short-lived customers, Ely and Välimäki (2003) show that unlimited record-keeping may induce the expert to overchoose a certain action, seeking reputational gains. Consequently, welfare may reduce and markets may break down. We show that simple rating systems in such world help overcome market failures and improve upon both the full-memory and the no-memory cases.

Keywords: Bad reputation; Rating systems; Bounded rationality (search for similar items in EconPapers)
JEL-codes: D82 D83 L15 M3 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:142:y:2023:i:c:p:150-178

DOI: 10.1016/j.geb.2023.07.019

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