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

Li, Lingfang (Ivy) and Xiao, Erte (2010): Money Talks? An Experimental Study of Rebate in Reputation System Design.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: reputation, trust, feedback mechanism, asymmetric information, public goods, experimental economics
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, Operations, and Impact; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; L - Industrial Organization > L8 - Industry Studies: Services > L86 - Information and Internet Services ; Computer Software; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior

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