Trust, reputation, and the value of promises in online auctions of used goods

Abstract

Buyers in online markets pay higher prices to sellers who promise a high-quality product in auctions of used goods, even though they cannot assess quality until after the sale. The principal argument offered in prior work is that reputation systems render sellers’ ‘cheap talk’ credible by allowing buyers to publicly rate sellers’ past honesty and sellers to build a reputation for being honest. We test this argument using both observational data from online auctions on eBay and an internet experiment. Strikingly, in both studies we find that unverifiable promises are trusted by buyers regardless of seller reputation or the presence of a reputation system, and sellers mostly refuse to take advantage. We conclude that the prevailing conception of markets in economic sociology as made possible by opportunism-curtailing institutions is “undersocialized”: Reputation systems may be used to identify more reliable providers of a product, but that they would be needed to prevent otherwise rampant deceit relies on a cynical assumption about human behavior that is empirically untenable.