Money talks: rebate mechanisms in reputation system design

Reputation systems that rely on voluntary feedback from traders are important in creating and sustaining trust in markets. Feedback nevertheless is a public good, and providing it is often costly. We combine theory with a laboratory experiment to study the effect of a seller precommitment mechanism: Sellers have an option to commit by providing a rebate to reduce the buyer s feedback reporting cost before making purchasing decisions. Our theory predicts that this mechanism induces noncooperative sellers to cooperate in the listed-price market. Using a buyer-seller trust game with a unilateral feedback scheme, we find that the seller s rebate decision has a significant impact on the buyer s purchasing decision via signaling the seller s cooperative type. More importantly, market efficiency under the precommitment mechanism increases with the probability that sellers will provide a rebate. Compared with the no rebate mechanism market, more efficient trades can be achieved when the sellers offer a rebate to the buyers in the market with the rebate mechanism, even when the rebate does not cover the full cost of feedback reporting.