Essays on reputation

Abstract

In the dissertation, we study the value of reputation in a market prone to adverse selection and also the incentives of the individuals in that market to participate in the reputation mechanism. Ever since [Akerlof, 1970], it is known that adverse selection can hinder trade. Reputation can be used as a possible mechanism in mitigating adverse selection problems, resolving the inefficiencies caused by asymmetric information and help the marketplace to thrive. There are a number of examples of such online markets which have been conceived, have survived and have thrived during the internet age. These markets have been kept alive by their built-in reputation systems. In this dissertation, I focus on the effects of reputation on eBay online market. In chapter 1, I study how actors in a marketplace can introduce mechanisms to overcome adverse selection, and I focus on one mechanism employed by eBay: sellers’ reputation. Using a unique data set that follows sellers on eBay over time, I show that reputation, according to various measures, is a major determinant of variations in the prices of homogeneous goods sold on eBay, in particular, for iPods. Inspired by this observation, I develop a model of firm dynamics where firms have heterogeneous qualities that are unobservable by consumers. Reputation is used as a signal of private information to buyers in order to improve allocations. I structurally estimate this model to uncover deep parameters of buyers’ utility and sellers’ costs as well as sellers’ unobservable qualities. The estimated model suggests that reputation has a positive effect on the expected profits of high quality sellers and their market shares. I perform a counterfactual to establish the value of reputation. Removing reputation mechanisms put in place by eBay will increase the profits of low quality sellers and will decrease the profits of high quality sellers. Moreover, removing reputation mechanisms significantly increases the market share of low quality sellers and decreases the market share of high quality sellers. Finally, buyers’ welfare is significantly improved as a result of the reputation mechanism. In chapter 2, we focus on incentives of buyers and sellers in leaving feedback and their effect on emergence of reputation systems in online markets. To do so, we analyze how such systems work and we turn our focus on eBay. We start by analyzing the feedback behavior of buyers and sellers over time. We use a key policy change, that sellers cannot leave negative feedback for buyers, as an identifier. Our data analysis points to the existence of retaliation between buyers and sellers before the policy change. Furthermore, we develop a model of feedback behavior as a dynamic game between buyers and sellers and structurally estimate the model. The structural estimation further establishes the existence of retaliation incentives between buyers and sellers. Finally, we perform various welfare and counterfactual analysis.