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Efficiency and Robustness of Binary Feedback Mechanisms in Trading Environments with Moral Hazard

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dc.contributor.author Dellarocas, Chrysanthos
dc.date.accessioned 2003-04-14T19:32:51Z
dc.date.available 2003-04-14T19:32:51Z
dc.date.issued 2003-04-14T19:32:51Z
dc.identifier.uri http://hdl.handle.net/1721.1/1852
dc.description.abstract This paper offers a systematic exploration of online feedback mechanism design issues in trading environments with opportunistic sellers, imperfect monitoring of a seller's effort level, and two possible transaction outcomes (corresponding to "high" and "low" quality respectively), one of which has no value to buyers. The objective of feedback mechanisms in such settings is to induce sellers to exert high effort and, therefore, to maximize the probability of high quality outcomes. I study a practically significant family of mechanisms that resembles aspects of the one used by online auction house eBay. These feedback mechanisms solicit "binary" ratings of transaction outcomes as either positive or negative and publish the sums of ratings posted by buyers on a seller during the N most recent periods. My analysis finds that such "binary" feedback mechanisms can induce high average levels of cooperation that remain stable over time. Surprisingly, their efficiency cannot be improved by summarizing larger numbers of ratings or by publishing a seller's detailed feedback history. I further examine the robustness of these mechanisms to incorrect or incomplete feedback as well as to strategic changes of online identities. The theoretical outcomes predicted by this paper are consistent with empirical observations and offer theory-backed explanations to hitherto poorly understood phenomena such as the remarkably low fraction of negative feedback on eBa en
dc.format.extent 435708 bytes
dc.format.mimetype application/pdf
dc.language.iso en_US
dc.relation.ispartofseries MIT Sloan School of Management Working Paper;4297-03
dc.subject Online Feedback Mechanisms en
dc.subject E-commerce en
dc.subject Moral Hazard en
dc.subject Game Theory en
dc.subject Electronic Markets en
dc.subject Internet en
dc.title Efficiency and Robustness of Binary Feedback Mechanisms in Trading Environments with Moral Hazard en
dc.type Working Paper en


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