Electronic Feedback Mechanisms and Indirect Reciprocity

Pennsylvania State Univ University Park, University Park PA

Investigators

Abstract

Online reputation or "feedback" mechanisms, such as those used by eBay.com and Amazon.com, aim to mitigate the moral hazard problems associated with online exchange among strangers, by providing the type of information available in more traditional close-knit groups, where members are frequently involved in one another's dealings. Trust and trustworthiness are nevertheless a much-noted problem; a recent U.S. Department of Justice survey (2002), for example, cites high levels of online fraud even at sites with online feedback systems. Since alternative methods of control, such as legal enforcement, are expensive, research into improving feedback mechanisms is important to the long-term expansion of online markets. There are also closely associated basic research questions concerning the nature of indirect reciprocity ('I trust you because before you were trustworthy with others.'), and the relationship of indirect reciprocity to direct reciprocity (I trust you because before you were trustworthy with me.'). The significance of these issues goes beyond online markets, extending to trust and trustworthiness in traditional markets and to the role of reputation building in general social interactions. The proposed research is comprised of three inter-related studies. Each uses an experimental online market to investigate important theoretical questions. The first study investigates the aspects of online markets that hinder or enhance feedback mechanism performance including the role of social ties, and the impact of feedback scores on pricing and number of potential trading partners. The second study investigates the amount of information necessary to support indirect reciprocity. Some models suggest that reputation building can, under certain circumstances, be quite robust to incomplete information about a person's reputation but this is unproven. The third area of investigation concerns development of a more refined theoretical explanation of the difference between direct and indirect reciprocity. An experiment will investigate why present models do not capture differences uncovered in previous investigations, and ideas from the resulting data will used to develop a formal model. The aim of the research, in terms of market design, is to provide policy recommendations on how feedback systems can be improved. The aim, in terms of our basic understanding of indirect and direct reciprocity, is to provide a better understanding of how people use information about the reputations of others in their decision making, an issue of importance to institutions and organizations throughout society.