A solution to marketplace information asymmetries is to have trading partners publicly rate each other post-transaction. Many have shown that these ratings are effective; we show that their effectiveness deteriorates over time. The problem is that ratings are prone to inflation, with raters feeling pressure to leave “above average” ratings, which in turn pushes the average higher. This pressure stems from raters’ desire to not harm the rated seller. As the potential to harm is what makes ratings effective, reputation systems, as currently designed, sow the seeds of their own irrelevance.
Author contact information and code are currently or will be available at http://www.john-josephhorton.com. Thanks to Richard Zeckhauser, Foster Provost, Andrey Fradkin, David Holtz, Ramesh Johari, Nico Lacetra, Xiao Ma, and Aaron Sojourner for very helpful comments and suggestions. We have not received any funding for this work. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.