Gabelli School of Business
140 W 62nd Street
New York, NY 10023
Institutional Affiliation: Fordham University
NBER Working Papers and Publications
|May 2019||Reputation Inflation|
with John J. Horton, Joseph M. Golden: w25857
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.