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Reputation vs Selection Effects in Markets with Informational Asymmetries

Author

Listed:
  • Theodore Alysandratos

    (Heidelberg University)

  • Sotiris Georganas

    (City-University of London)

  • Matthias Sutter

    (Max Planck Institute for Research on Collective Goods, University of Cologne, University of Innsbruck, IZA, and CESifo)

Abstract
In markets with asymmetric information between sellers and buyers, feedback mechanisms are important to increase market efficiency and reduce the informational disadvantage of buyers. Feedback mechanisms might work because of self-selection of more trustworthy sellers into markets with such mechanisms or because of reputational concerns of sellers. In our field experiment, we can disentangle self-selection from reputation effects. Based on 476 taxi rides with four different types of taxis, we can show strong reputation effects on the prices and service quality of drivers, while there is practically no evidence of a self-selection effect. We discuss policy implications of our findings.

Suggested Citation

  • Theodore Alysandratos & Sotiris Georganas & Matthias Sutter, 2022. "Reputation vs Selection Effects in Markets with Informational Asymmetries," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2022_08, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2022_08
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    References listed on IDEAS

    as
    1. Balafoutas, Loukas & Kerschbamer, Rudolf, 2020. "Credence goods in the literature: What the past fifteen years have taught us about fraud, incentives, and the role of institutions," Journal of Behavioral and Experimental Finance, Elsevier, vol. 26(C).
    2. Steffen Huck & Gabriele K. Lünser & Jean-Robert Tyran, 2016. "Price competition and reputation in markets for experience goods: an experimental study," RAND Journal of Economics, RAND Corporation, vol. 47(1), pages 99-117, February.
    3. Kerschbamer, Rudolf & Neururer, Daniel & Sutter, Matthias, 2019. "Credence Goods Markets and the Informational Value of New Media: A Natural Field Experiment," IZA Discussion Papers 12184, Institute of Labor Economics (IZA).
    4. Mimra, Wanda & Rasch, Alexander & Waibel, Christian, 2016. "Price competition and reputation in credence goods markets: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 100(C), pages 337-352.
    5. Guido Friebel & Michael Kosfeld & Gerd Thielmann, 2019. "Trust the Police? Self-Selection of Motivated Agents into the German Police Force," American Economic Journal: Microeconomics, American Economic Association, vol. 11(4), pages 59-78, November.
    6. Gary E. Bolton & Elena Katok & Axel Ockenfels, 2004. "How Effective Are Electronic Reputation Mechanisms? An Experimental Investigation," Management Science, INFORMS, vol. 50(11), pages 1587-1602, November.
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    8. Alexander Rasch & Christian Waibel, 2018. "What Drives Fraud in a Credence Goods Market? – Evidence from a Field Study," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 80(3), pages 605-624, June.
    9. Matthias Wibral, 2015. "Identity changes and the efficiency of reputation systems," Experimental Economics, Springer;Economic Science Association, vol. 18(3), pages 408-431, September.
    10. Loukas Balafoutas & Adrian Beck & Rudolf Kerschbamer & Matthias Sutter, 2013. "What Drives Taxi Drivers? A Field Experiment on Fraud in a Market for Credence Goods," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(3), pages 876-891.
    11. Uwe Dulleck & Rudolf Kerschbamer & Matthias Sutter, 2011. "The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition," American Economic Review, American Economic Association, vol. 101(2), pages 526-555, April.
    12. Mark Egan & Gregor Matvos & Amit Seru, 2019. "The Market for Financial Adviser Misconduct," Journal of Political Economy, University of Chicago Press, vol. 127(1), pages 233-295.
    13. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    14. Rudolf Kerschbamer & Matthias Sutter & Uwe Dulleck, 2017. "How Social Preferences Shape Incentives in (Experimental) Markets for Credence Goods," Economic Journal, Royal Economic Society, vol. 127(600), pages 393-416, March.
    15. Rudolf Kerschbamer & Matthias Sutter & Uwe Dulleck, 2017. "How Social Preferences Shape Incentives in (Experimental) Markets for Credence Goods," Economic Journal, Royal Economic Society, vol. 127(600), pages 393-416, March.
    16. Brit Grosskopf & Rajiv Sarin, 2010. "Is Reputation Good or Bad? An Experiment," American Economic Review, American Economic Association, vol. 100(5), pages 2187-2204, December.
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    More about this item

    Keywords

    information asymmetries; reputation mechanisms; selection effects; credence goods; field experiment;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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