Buying Reputation as a Signal of Quality: Evidence from an Online Marketplace

Abstract

Reputation is critical to foster trust in online marketplaces, yet leaving feedback is a public good that can be under-provided unless buyers are rewarded for it. Signaling theory implies that only high quality sellers would reward buyers for truthful feedback. We explore this scope for signaling using Taobao's "reward-for-feedback" mechanism and find that items with rewards generate sales that are nearly 30%higher and are sold by higher quality sellers. The market design implication is that marketplaces can b…