TY  - JOUR
AU  - Cabral,Luis
AU  - Hortacsu,Ali
TI  - The Dynamics of Seller Reputation: Theory and Evidence from eBay
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10363
PY  - 2004
Y2  - March 2004
UR  - http://www.nber.org/papers/w10363
L1  - http://www.nber.org/papers/w10363.pdf
N1  - Author contact info:
Luis Cabral
IESE Business School
165 West 57th Street
New York, NY 10019
E-Mail: lcabral@stern.nyu.edu

Ali Hortacsu
Department of Economics
University of Chicago
1126 East 59th Street
Chicago, IL  60637
Tel: 773/702-5841
E-Mail: hortacsu@uchicago.edu
AB  - We propose a basic theoretical model of eBay's reputation mechanism, derive a series of implications and empirically test their validity. Our theoretical model features both adverse selection and moral hazard. We show that when a seller receives a negative rating for the first time his reputation decreases and so does his effort level. This implies a decline in sales and price; and an increase in the rate of arrival of subsequent negative feedback. Our model also suggests that sellers with worse records are more likely to exit (and possibly re-enter under a new identity), whereas better sellers have more to gain from  buying a reputation' by building up a record of favorable feedback through purchases rather than sales. Our empirical evidence, based on a panel data set of seller feedback histories and cross-sectional data on transaction prices collected from eBay is broadly consistent with all of these predictions. An important conclusion of our results is that eBay's reputation system gives way to strategic responses from both buyers and sellers.
ER  -