How Effective are Online Reputation Mechanism?

Online reputation -"feedback"- mechanism aim to mitigate the moral hazard problem associated with spatially distant exchange among strangers by providing traders with the type of information available in small groups, where members are frequently involved in another's dealings. We compare trading in a market with feedback to a market without as well as to a market in which the same people interact with one another repeatedly (partners market). We find that, while the feedback mechanism induces quite substantial improvement in transaction efficiency, it also exhibits a kind of public goods problem in that, unlike the partner market, the benefits of trust and trustworthy behavior go to the whole community and are not completely internalized. We discuss the implications of this perspective for improving these systems.