Guanghua School of Management
NBER Working Papers and Publications
|April 2013||More Trusting, Less Trust? An Investigation of Early E-Commerce in China|
with Hongbin Cai, Ginger Z. Jin, Li-An Zhou: w18961
Trust is vital for market development, but how can trust be enhanced in a marketplace? A common view is that more trusting may help to build trust, especially in less developed economies. In this paper, we argue that more trusting may lead to less trust. We set up a rational expectation model in which a marketplace uses buyer protection to promote buyer trusting. Our results show that buyer protection may reduce trust in equilibrium and even hinder market expansion because it triggers differential entry between honest and strategic sellers and may induce more cheating from strategic sellers. Using a large transaction-level data set from the early years of Eachnet.com (an eBay equivalent in China), we find evidence that is consistent with the model predictions. Stronger buyer protection lea...