More Trusting, Less Trust? An Investigation of Early E-commerce in China∗

Trust is vital for market development, but how can trust be enhanced in an online marketplace? A common view is that more trusting of buyers may help to build seller trustworthiness. This paper highlights a possibility that encouraging buyer trusting may lower seller trustworthiness in equilibrium. In particular, we set up a rational expectation model in which a marketplace uses buyer protection to promote buyer trusting. We show that it is possible for buyer protection to reduce trust in equilibrium and even hinder market expansion because it triggers differential entry between honest and strategic sellers and may induce more cheating from strategic sellers. Using a large transaction-level data set from the early years of Eachnet.com (an eBay equivalent in China), we find evidence that is consistent with this theoretical possibility. Stronger buyer protection leads to less favorable evaluation of seller behavior and is associated with slower market expansion. These findings suggest that a trust-promoting policy aiming at buyer trusting may not be effective if it is not accompanied by additional incentives to improve seller trustworthiness.