Research Note---How Often Should Reputation Mechanisms Update a Trader's Reputation Profile?

  • Authors:

  • Chrysanthos Dellarocas

  • Affiliations:

  • 4341 Van Munching Hall, R. H. Smith School of Business, University of Maryland, College Park, Maryland 20742

  • Venue:
  • Information Systems Research
  • Year:
  • 2006

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Abstract

Reputation mechanisms have become an important component of electronic markets, helping to build trust and elicit cooperation among loosely connected and geographically dispersed economic agents. Understanding the impact of different reputation mechanism design parameters on the resulting market efficiency has thus emerged as a question of theoretical and practical interest. Along these lines, this note studies the impact of the frequency of reputation profile updates on cooperation and efficiency. The principal finding is that, in trading settings with pure moral hazard and noisy ratings, if the per-period profit margin of cooperating sellers is sufficiently high, a mechanism that does not publish every single rating it receives but rather only updates a trader's public reputation profile every k transactions with a summary statistic of a trader's most recent k ratings can induce higher average levels of cooperation and market efficiency than a mechanism that publishes all ratings as soon as they are posted. This paper derives expressions for calculating the optimal profile updating interval k, discusses the implications of this finding for existing systems, such as eBay, and proposes alternative reputation mechanism architectures that attain higher maximum efficiency than the, currently popular, reputation mechanisms that publish summaries of a trader's recent ratings.