NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Buying Reputation as a Signal of Quality: Evidence from an Online Marketplace

Lingfang (Ivy) Li, Steven Tadelis, Xiaolan Zhou

NBER Working Paper No. 22584
Issued in September 2016
NBER Program(s):Industrial Organization

Reputation is critical to foster trust in online marketplaces, yet leaving feedback is a public good that can be under-provided unless buyers are rewarded for it. Signaling theory implies that only high quality sellers would reward buyers for truthful feedback. We explore this scope for signaling using Taobao's "reward-for-feedback" mechanism and find that items with rewards generate sales that are nearly 30% higher and are sold by higher quality sellers. The market design implication is that marketplaces can benefit from allowing sellers to use rewards to build reputations and signal their high quality in the process.

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Document Object Identifier (DOI): 10.3386/w22584

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