Adverse Selection and Moral Hazard in Anonymous Markets

T.J. Klein, C. Lambertz, K. Stahl

Research output: Working paperDiscussion paperOther research output

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Abstract

Abstract: 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.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages42
Volume2013-032
Publication statusPublished - 2013

Publication series

NameCentER Discussion Paper
Volume2013-032

Fingerprint

Adverse selection
Moral hazard
Seller
Rating
Exit
Buyers
Costs

Keywords

  • Anonymous markets
  • adverse selection
  • moral hazard
  • reputation building mechanisms

Cite this

Klein, T. J., Lambertz, C., & Stahl, K. (2013). Adverse Selection and Moral Hazard in Anonymous Markets. (CentER Discussion Paper; Vol. 2013-032). Tilburg: Econometrics.
Klein, T.J. ; Lambertz, C. ; Stahl, K. / Adverse Selection and Moral Hazard in Anonymous Markets. Tilburg : Econometrics, 2013. (CentER Discussion Paper).
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Klein, TJ, Lambertz, C & Stahl, K 2013 'Adverse Selection and Moral Hazard in Anonymous Markets' CentER Discussion Paper, vol. 2013-032, Econometrics, Tilburg.

Adverse Selection and Moral Hazard in Anonymous Markets. / Klein, T.J.; Lambertz, C.; Stahl, K.

Tilburg : Econometrics, 2013. (CentER Discussion Paper; Vol. 2013-032).

Research output: Working paperDiscussion paperOther research output

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AU - Lambertz, C.

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N2 - Abstract: 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.

AB - Abstract: 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.

KW - Anonymous markets

KW - adverse selection

KW - moral hazard

KW - reputation building mechanisms

M3 - Discussion paper

VL - 2013-032

T3 - CentER Discussion Paper

BT - Adverse Selection and Moral Hazard in Anonymous Markets

PB - Econometrics

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Klein TJ, Lambertz C, Stahl K. Adverse Selection and Moral Hazard in Anonymous Markets. Tilburg: Econometrics. 2013. (CentER Discussion Paper).