Guided Search: The Value of a Reputation System

Reputation systems have emerged as important sources of information in modern economies. This paper develops a model of reputation systems that puts buyers and sellers inside a stochastic environment involving asymmetric information and search frictions, and gives them a set of options with which to overcome these barriers to trade. This model offers predictions about the effects reputation systems have on the advertising decisions of quality differentiated sellers and the search decisions of buyers. The model also gives fairly general results regarding the welfare effects of reputation systems and provides a framework for analyzing and comparing reputation systems. We also compare equilibrium reputation systems under monopoly, competition, and social planning