informs ® doi 10.1287/mnsc.1050.0379

This paper offers a systematic exploration of reputation mechanism design in trading environments with opportunistic sellers of commonly known cost and ability parameters, imperfect monitoring of a seller’s actions, and two possible seller effort levels, one of which has no value to buyers. The objective of reputation mechanisms in such pure moral hazard settings is to induce sellers to exert high effort as often as possible. I study the impact of various mechanism parameters (such as the granularity of solicited feedback, the format of the public reputation profile, the policy regarding missing feedback, and the rules for admitting new sellers) on the resulting market efficiency. I find that maximum efficiency is bounded away from the hypothetical firstbest case where sellers can credibly precommit to full cooperation by a factor that is related to the probability that cooperating sellers may receive “unfair ” bad ratings. Furthermore, maximum efficiency is independent of the length of past history summarized in a seller’s public reputation profile. I apply my framework to a simplified model of eBay’s feedback mechanism and conclude that, in pure moral hazard settings, eBay’s simple mechanism is capable of inducing the maximum theoretical efficiency independently of the number of recent ratings that are being summarized in a seller’s profile. I derive optimal policies for dealing with missing feedback and easy online identity changes. Finally, I show that if the number of buyers is large, the results obtained in the monopoly case are also approximately valid in settings where multiple sellers of different reputations simultaneously offer auctions for identical goods. Key words: reputation mechanisms; moral hazard; online auctions; eBay

Online reputation mechanisms need honest feedback to function effectively. Self interested agents report the truth only when explicit rewards offset the cost of reporting and the potential gains that can be obtained from lying. Side-payment schemes (monetary rewards for submitted feedback) can make truth-telling rational based on the correlation between the reports of different buyers. In this paper we use the idea of automated mechanism design to construct the payments that minimize the budget required by an incentive-compatible reputation mechanism. Such payment schemes are defined by a linear optimization problem that can be solved efficiently in realistic settings. Furthermore, we investigate two directions for further lowering the cost of incentive-compatibility: using several reference reports to construct the side-payments, and filtering out reports that are probably false.

in online auction settings with noisy monitoring of quality and adverse selection. The mechanism combines the ability of electronic markets to solicit feedback from buyers with the more traditional ability to levy listing fees from sellers. Each period the mechanism charges a listing fee contingent on a seller's announced expected quality. It subsequently pays the seller a reward contingent on both his announced quality and the rating posted for that seller by that period's winning bidder. I show that, in the presence of a continuum of seller types with di#erent cost functions, imperfect private monitoring of a seller's e#ort level and a simple "binary" feedback mechanism that asks buyers to rate a transaction as "good" or "bad", it is possible to derive a schedule of fees and rewards that induces all seller types to produce at their respective first-best quality levels and to truthfully announce their intended quality levels to buyers. The mechanism maximizes average social welfare for the entire community and is robust to a number of contingencies of particular concern in online environments, such as easy name changes and the existence of inept sellers. On the other hand, the mechanism distorts the resulting payo#s of transferring part of the payo#s of more e#cient sellers to less e#cient sellers. The magnitude of this distortion is proportional to the amount of noise associated with observing and reporting the quality of a good.

This paper studies collusion in repeated Bertrand oligopoly when stochastic demand levels for the product of each firm are their private information and are positively correlated. It derives general sufficient conditions for efficient collusion through communication and a simple grim-trigger strategy. This analysis is then applied to a model where the demand signal has multiple random components which respond differently to price deviations. In this model, it is shown that the above sufficient conditions hold if idiosyncratic noise terms are sufficiently small.

It is well known that contract incompleteness can arise from the impossibility of planning for all future contingencies in a relationship (e.g. Williamson (1975)). In this paper it is shown that whether or not such incompleteness constrains the efficiency of the contract is very sensitive to assumptions concerning the timing of the resolution of uncertainty. It is shown that when agents must respond to an unforeseen contingency before being able to renegotiate the contract, then contract complexity is a binding constraint, a case that is called ex post hold-up. Secondly, it is suggested that the amount of multi-tasking can provide a measure of contract complexity. When complexity is low, contingent contracting is efficient, while subjective performance evaluation is more efficient when complexity is high. In this case the optimal contract for ex post hold-up is based upon the ability of humans to make subjective judgements that are in some cases more informative than explicit performance measures. Moreover, the efficiency of the contract is not sensitive to human error per se, but is an increasing function of the correlation in judgements between the contracting parties. ∗I very much appreciate the comments of the referees, Tom Lyon, Eric Rasmusen, Sherwin Rosen, Eric Tally, and Oliver

Abstract not found

ABSTRACT. The limit set of perfect public equilibrium payoffs of a repeated game as the discount factor goes to one is characterized, with examples, even when the full-dimensionality condition fails.

Summary. Trust and reputation systems have proven to be essential to enforcing cooperative behavior in peer-to-peer networks. We briefly describe the current approaches to building reputation systems: social networks formation, probabilistic estimation and game theoretic models. We then observe that all of the current models make a number of simplifying assumptions that may not necessarily hold in real networks, such as either irrational (probabilistic) or completely rational behavior, instant propagation of reputation information and homogeneity of interactions. We argue that dropping those assumptions and allowing more degrees of freedom is necessary in order to construct more realistic and rich reputation models. We support our argument by citing reputation research done in economics, evolutionary psychology, biology and sociology and and consider models that take into account adaptive behavior changes, co-evolution of behaviors, bounded rationality and variable interaction patterns. We then outline how those complexities can be dealt with and point out main directions for the future study of more realistic and less constrained reputation models that can potentially lead to construction of more secure, responsive and cooperative peer-to-peer systems. 1

This paper analyzes the role of communication between firms in an infinitely repeated Bertrand game in which firms receive an imperfect private signal of a common value i.i.d. demand shock. It is shown that firms can use stochastic, inter-temporal market sharing as a perfect substitute for communication in low demand states. Therefore, partial communication in high demand states is sufficient to achieve the most collusive, full communication outcome. And partial communication in low demand state does not improve on the equilibrium without communication. Communication in high demand states allows firms to coordinate their pricing, choose the most efficient uninformed price and avoid price wars. I demonstrate that under some conditions consumers are better off with communication among colluding firms.