informs ® doi 10.1287/mnsc.1050.0379

Reputation mechanisms harness the bi-directional communication capabilities of the Internet in order to engineer large-scale word-of-mouth networks. Best known so far as a technology for building trust and fostering cooperation in online marketplaces, such as eBay, these mechanisms are poised to have a much wider impact on organizations. This paper surveys our progress in understanding the new possibilities and challenges that these mechanisms represent. It discusses some important dimensions in which Internet-based reputation mechanisms differ from traditional word-of-mouth networks and surveys the most important issues related to their design, evaluation, and use. It provides an overview of relevant work in game theory and economics on the topic of reputation. It discusses how this body of work is being extended and combined with insights from computer science, marketing, and psychology in order to take into consid-eration the special properties of online environments. Finally, it identifies opportunities that this new area presents for information systems research. 1

We study the endoT- dynamicso reputatio in a system co sistingo f firms with lo ho that pro vide go o dso r services with varying levelso f quality, and large numberso f custoT who assignto them reputatio- o the basiso f the quality levels that they experience when interacting with them. Wesho w thatfo givendisco tso f the pasto the parto f thecustoT- ando f e#o levelso the parto f the firms, the dynamics can lead to either well defined equilibriao r persistent noT- oTin the number ocustoT visiting a firm, implying unstable reputatio We establish the criteria under which equilibria are stable andalso sho w the existenceo f large transients which canalso render fixed po ts unattainable withinreaso times.Moes ver we establish that the time scalesfo the buildup and decay o reputatio in the caseo private infoTare much lo that tho invo lving public infoTT This pro vides a plausibleexplanatio fo the rather sudden increase and co o f reputatio in a numbero f much publicized cases. 1

Abstract. We experimentally studied the effects of a eBay-style selfreporting reputation mechanism in an double-sided exchange economy in which participants have the option of not fulfilling their contracts. We found that submitted reports quite accurately reflected their transactions and this mechanism maintaining a high contract fulfillment rate. The inaccurate reports, which were about 5 % of the total, were heavily biased towards bad ratings when the transaction is successful. This is strong evidence that the inaccurate reports were not results of random errors, but derived from an underlying behavior effect. Our experimental design allowed identifying the effect of reputation mechanism on endogenous market behavior. 1

discussions, and seminar participants at the University of British Columbia for many useful Corporate managers and brokerage analysts sometimes have information that investors would find useful. However, managers and analysts are often compensated based on what they report rather than the eventual accuracy of their report. Thus, both would seem to have incentives to inflate earnings forecasts. Why not compensate based on report accuracy? In a model with asymmetric information between a manager and investors and no moral hazard, we show that both investors and the manager can prefer compensation that depends on what is reported rather than its accuracy. The key assumption is that the manager has a stochastic, persistent non-wage income that is unobservable to investors, and that all wage and non-wage income is consumed each period. The risk-averse manager manipulates reports to induce negative correlation between non-wage and wage income, thereby reducing consumption variability. Investors learn about the manager’s propensity for truth-telling by inferring his current nonwage income from the report history. Thus, reputation is endogenous and provides the manager self-insurance against low non-wage income states. This equilibrium is characterized as partial truth-telling, and can be preferred by both the manager and investors to a full truthtelling equilibrium obtained from accuracy-based compensation. JEL Classification: G30

We experimentally evaluate reputation mechanisms in an exchange market in which participants have the option of not fulfilling their contracts.

We propose a basic theoretical model of eBay’s reputation mechanism, derive a series of implications and empirically test their validity. Our theoretical model features both adverse selection and moral hazard. We show that when a seller receives a negative rating for the first time his reputation decreases and so does his effort level. This implies a decline in sales and sale price; and an increase in the rate of arrival of subsequent negative feedback. Our model also suggests that sellers with worse records are more likely to exit (and possibly re-enter under a new identity), whereas better sellers have more to gain from “buying a reputation ” by building up a record of favorable feedback through purchases rather than sales. Our empirical evidence, based on a panel data set of seller feedback histories and cross-sectional data on transaction prices collected from eBay, is broadly consistent will all of these predictions. An important conclusion of our results is that eBay’s reputation system gives way to strategic responses from both buyers and sellers.

This paper presents an institution- the Community Responsibility System (CRS)- which has been a missing link in our understanding of market development. The CRS fostered market expansion throughout pre-modern Europe by providing the contract enforcement required for impersonal exchange characterized by separation between the quid and the quo over time and space. It supported market expansion because it did not entail the high marginal cost of establishing new exchange relationships based on a reputation mechanism or the high fixed cost associated with establishing an effective centralized legal system. Merchant communes, motivated by concern over their collective reputations, utilized their local and partial intra-community legal institutions to discipline members who cheated in inter-community exchange and to create the organizational infrastructure required for anonymous merchants to credibly reveal their identities. The CRS endogenously declined as the trade it fostered undermined its self-enforceability. Depending on the prevailing political conditions, it was gradually replaced by a centralized legal system based on personal (rather than collective) legal responsibility and supported by the state. This institutional dynamic supports the view that long-distance trade impacts economic growth through its influence on intra-state institutional development. (JEL Classification: N0, N2, C7.)

This paper develops a model to explain why mass privatization can become troublesome when taking into account asymmetry of information and economies of scale. It also shows that, in early stages of reforms, organizational form is irrelevant, but cooperation among the contractual parties is necessary for efficiency. We then incorporates repeated-game framework into the model to study how property rights are gradually formed in China and how informal social mechanisms work to promote cooperation. One distinct feature of China’s reforms is the contingent devolution of power: local firms and agencies are offered a high degree of autonomy for achieving cooperation and high investment. Such a contingent delegation combined with capital mobility creates market booms within the old regime. Later, this regime is gradually replaced by a new ownership structure.

How do individuals, goods or services through their own reputation give birth to a group’s reputation and conversely how do they take advantage of this group’s reputation? Do they contribute to (derive benefit from)the group’s reputation in proportion to their individual reputation or in a different way? To address these questions we analyze a simple theoretical situation inwhichanindividualwithanintermediatereputationlevelcanchoosebetween a position of follower in a first-rank organization and a position of leader in a second-rank organization. In this model collective reputation both determines and is determined-simultaneously- by individual reputations as suggested by Tirole (1996). Then, the theoretical model is applied to the case of Bordeaux wines from a rich dataset on individual quality opinions. The overall results suggest that: (i) a group’s reputation is a simple computation of its most famous members ’ reputation, (ii) the leaders get on average higher umbrella impacts than the followers even if the best position seems to be one of follower among the group of leaders.