Trust and Reputation on eBay: Micro and Macro Perspectives

The Dynamics of Seller Reputation: Evidence from eBay Lu´ Cabral ∗ is New York University and CEPR Ali Horta¸ su ∗ c University of Chicago and NBER June 2005 Abstract We construct a panel of eBay seller histories and examine the im- portance of eBay’s reputation mechanism. We find that, when a seller first receives negative feedback, his weekly sales rate drops from a pos- itive 7% to a negative 7%; subsequent negative feedback ratings arrive 25% more rapidly than the first one and don’t have nearly as much impact as the first one. We also find that a seller is more likely to exit the lower his reputation is; and that, just before exiting, sellers receive more negative feedback than their lifetime average. We consider a series of theoretical models and measure them against these empirical results. Regardless of which theoretical model best ex- plains the data, an important conclusion of our paper is that eBay’s reputation system gives way to noticeable strategic responses from both buyers and sellers. Keywords: adverse selection, moral hazard, quality, reputation, auc- tions, eBay. JEL Code Nos.: D44, L15, L86 lcabral@stern.nyu.edu; hortacsu@uchicago.edu. We thank Kenny Ballendir, Tim Miller and Jeremy Shapiro for truly outstanding research assistance. We also thank Damien De- Walque, Svetlozar Nestorov, Mike Riordan, Anne Rogers, Steve Tadelis, and seminar par- ticipants at Chicago, Essex, Copenhagen, SED meetings, NBER Summer Institute, George- town, Tufts, Rochester, NYU, Columbia, Dartmouth (Tuck), Arizona, and the 2004 ASSET meeting for helpful comments and suggestions. Horta¸ su acknowledges financial support c from the National Science Foundation (Grant SES-0242031). The usual disclaimer applies.