Revoking and Moral Hazard on eBay: An Empirical Investigation

This study examines a crucial aspect of the reputation mechanism design in electronic markets – the ability of buyers and sellers to revoke or mutually withdraw negative feedback and ratings. We find that the two-way reputation system – where both buyers as well as sellers could provide mutual feedback enabled certain sellers to behave opportunistically by getting buyers to revoke their negative feedbacks, making the reputation system less effective in discerning the quality of sellers. We also find that recent changes to the two-way reputation system have a significant influence on these sellers’ behavior. After the ban on revoking, we find that sellers exert more effort in improving the quality of their transactions and their reputation. Our findings support the moral hazard, rather than the adverse selection, assumption regarding seller behavior.