How to Counteract Negative Effect of Adverse Selection in Chinese E-Commerce Market? Comparative Analysis on Credit Scoring System and Guarantee System of TAOBAO

E-commerce transactions have a rapid development because of its convenience and flexibility. However, compared to the traditional market, the e-commerce transaction still could not get rid of information asymmetry between the online sellers and online buyers. Adverse selection problems brought by information asymmetry have negative impact on e-marketing and reduce the efficiency of the online transaction. Now some trading online platforms such as TAOBAO (http://www.taobao.com) are seeking ways to reduce adverse selection. Widely used approaches are credit scoring system and guarantee system. This paper takes transaction data from U disk market in TAOBAO as samples and analyzes the role of credit scoring system and guarantee system in Chinese e-commerce market. The results showed that the credit scoring system and guarantee system can effectively counteract negative effect from the adverse selection problems. Although the credit scoring system has a significant impact on transaction volume; guarantee system has greater impact on the trading volume than the credit scoring systems. In addition, relationship between the guarantee system and credit scoring system are not substitutes but complement for each other. In the case of the existence of the guarantee system, online consumers’ purchase for online goods options is still subject to the impact of the credit scoring system. The paper proposes strategy recommendations to improve credit scoring system and guarantee systems to promote the efficiency of online transactions.