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Money Talks? An Experimental Study of Rebate in Reputation System Design

Lingfang (Ivy) Li () and Erte Xiao ()

MPRA Paper from University Library of Munich, Germany

Abstract: Reputation systems that rely on feedback from traders are important institutions for helping sustain trust in markets, while feedback information is usually considered a public good. We apply both theoretical models and experiments to study how raters' feedback behavior responds to different reporting costs and how to improve market efficiency by introducing a pre-commitment device for sellers in reputation systems. In particular, the pre-commitment device we study here allows sellers to provide rebates to cover buyers' reporting costs before buyers make purchasing decisions. Using a buyer-seller trust game with a unilateral feedback scheme, we find that a buyer’s propensity to leave feedback is more sensitive to reporting costs when the seller cooperates than when the seller defects. The seller’s decision on whether to provide a rebate significantly affects the buyer’s decision to leave feedback by compensating for the feedback costs. More importantly, the rebate decision has a significant impact on the buyer's purchasing decision via signaling the seller's cooperative type. The experimental results show that the rebate mechanism improves the market efficiency.

Keywords: reputation; trust; feedback mechanism; asymmetric information; public goods; experimental economics (search for similar items in EconPapers)
JEL-codes: C91 D02 D03 D82 H41 L86 (search for similar items in EconPapers)
Date: 2010-04-29
New Economics Papers: this item is included in nep-cta, nep-exp and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed

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