DP9501 Adverse Selection and Moral Hazard in Anonymous Markets

Author(s): Tobias Klein, Christian Lambertz, Konrad O Stahl
Publication Date: June 2013
Keyword(s): adverse selection, anonymous markets, moral hazard, reputation building mechanisms
JEL(s): D83, L15
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9501

We study the effects of improvements in eBay's rating mechanism on seller exit and continuing sellers' behavior. Following a large sample of sellers over time, we exploit the fact that the rating mechanism was changed to reduce strategic bias in buyer rating. That improvement did not lead to increased exit of poorly rated sellers. Yet, buyer valuation of the staying sellers ? especially the poorly rated ones ? improved significantly. By our preferred interpretation, the latter effect results from increased seller effort; also, when sellers have the choice between exiting (a reduction in adverse selection) and improved behavior (a reduction in moral hazard), then they prefer the latter because of lower cost.