Lingfang (Ivy) Li
School of Management
Shanghai, China 200433
Institutional Affiliation: Fudan University
NBER Working Papers and Publications
|September 2016||Buying Reputation as a Signal of Quality: Evidence from an Online Marketplace|
with Steven Tadelis, Xiaolan Zhou: w22584
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.