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Money Talks: Rebate Mechanisms in Reputation System Design

Lingfang (Ivy) Li () and Erte Xiao ()
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Lingfang (Ivy) Li: Department of Industrial Economics, School of Management, Fudan University, 200433 Shanghai, China

Management Science, 2014, vol. 60, issue 8, 2054-2072

Abstract: Reputation systems that rely on voluntary feedback from traders are important in creating and sustaining trust in markets. Feedback nevertheless is a public good, and providing it is often costly. We combine theory with a laboratory experiment to study the effect of a seller precommitment mechanism: Sellers have an option to commit by providing a rebate to reduce the buyer's feedback reporting cost before making purchasing decisions. Our theory predicts that this mechanism induces noncooperative sellers to cooperate in the listed-price market. Using a buyer--seller trust game with a unilateral feedback scheme, we find that the seller's rebate decision has a significant impact on the buyer's purchasing decision via signaling the seller's cooperative type. More importantly, market efficiency under the precommitment mechanism increases with the probability that sellers will provide a rebate. Compared with the no rebate mechanism market, more efficient trades can be achieved when the sellers offer a rebate to the buyers in the market with the rebate mechanism, even when the rebate does not cover the full cost of feedback reporting.Data, as supplemental material, are available at . This paper was accepted by Teck-Hua Ho, behavioral economics.

Keywords: reputation; trust; feedback mechanism; asymmetric information; public good; experimental economics (search for similar items in EconPapers)
Date: 2014
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