We are grateful to two anonymous referees for comments and suggestions that helped to improve the paper. We also thank Heiko Gerlach, John Hillas, Ian King, Klaus Kultti, Eric Maskin, Matthew Ryan, Torben Tranæs, Jean Robert Tyran, Andrew Wait, Julian Wright and Randall Wright. Schiff thanks the Centre for Research in Network Economics and Communications, Auckland, and Kennes thanks the Centre for Applied Microeconometrics (CAM), Copenhagen, for financial support.
Simple Reputation Systems†
Article first published online: 31 MAY 2007
The Scandinavian Journal of Economics
Volume 109, Issue 1, pages 71–91, March 2007
How to Cite
Kennes, J. and Schiff, A. (2007), Simple Reputation Systems. The Scandinavian Journal of Economics, 109: 71–91. doi: 10.1111/j.1467-9442.2007.00481.x
- Issue published online: 31 MAY 2007
- Article first published online: 31 MAY 2007
- First version submitted April 2005;final version received April 2006.
- Directed search;
- competing auctions;
- reputation systems
We develop a model of simple “reputation systems” that monitor and publish information about the behavior of sellers in a search market with asymmetric information. The reputations created influence the equilibrium search patterns of buyers and thus provide for market-based “punishment” of bad behavior. We show that a reputation system that rewards honesty can enhance welfare by allowing good sellers to truthfully signal their type. However, the same system can be prone to strategic manipulation by sellers who always have low-quality products. In that case, we show that an alternative system which assigns reputations based on product quality rather than honesty can be superior.