Research

“Reputation and Adverse Selection: Theory and Evidence from eBay,” job market paper (PDF file coming soon)

As shown by many authors, adverse selection among sellers on eBay is very common, and ever since Ackerlof (1970), it is known that adverse selection can hinder trade. In this paper, I study how actors in a marketplace can introduce mechanisms to overcome adverse selection, and I focus on one mechanism employed by eBay: seller’s reputation. Using a unique data set that follows sellers on eBay over time, I show that reputation, according to various measures, is a major determinant of variations in prices of homogeneous goods sold on eBay (iPods in particular.) Inspired by this observation, I develop a model of firm dynamics where firms have heterogeneous qualities that are unobservable by consumers. Reputation is used as a signal of private information to buyers in order to improve allocations. I structurally estimate this model to uncover deep parameters of buyers’ utility and sellers’ costs as well as their unobservable qualities. The estimated model suggests that reputation has a positive effect on the expected profits of high quality sellers as well as their survival probability. Various counterfactuals have been performed to establish the value of reputation. Removing reputation mechanisms put in place by eBay will increase the profits of low quality sellers and will decrease the profits of high quality sellers. Moreover, removing reputation mechanisms significantly increases entry by low quality sellers. Finally, consumer welfare is significantly improved as a result of the reputation mechanism.

“To Be Top Rated or Not: An Analysis of eBay’s Reputation System,” with Zeqian Shen and Neel Sundaresan

Existence of adverse selection in lemon markets can lead to potential breakdown of trading or high inefficiencies in a marketplace as noted by Akerlof [1970]. Reputation can be used as a possible mechanism in mitigating lemon problems, resolving the inefficiencies caused by asymmetric information and help the marketplace to thrive. eBay, as a lemon market, was propped by a transparent reputation mechanism. eBay has, over years, adopted policies that it believes will ensure the functionality of the market. The goal of this paper is to study the use of feedback as a reputation mechanism over the life of eBay and also understand the possible effects of the policy changes on participation and the participants.