More Trusting, Less Trust? An Investigation of Early E-Commerce in China
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 leads to less favorable evaluation of seller behavior and is associated with slower market expansion. These findings suggest that a trust-promoting policy aiming at buyer trusting may not be effective if it is not accompanied by additional incentives to improve seller trustworthiness.
We are grateful for the generous provision of data from Eachnet.com. Comments from Larry Ausubel, Xiaohong Chen, John Rust, Phillip Leslie, attendees at the 2009 Conference of Industrial Organization and Management Strategy at Tsinghua University and attendees of seminars at Fudan University, Peking University, University of Maryland, the State University of New York, Stony Brook, Georgetown University and UCLA are deeply appreciated. All errors are ours. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.