The Emergence of Reputation in Economic Transactions. conference on 'Game Theory and Society'

Transcription

1 The Emergence of Reputation in Economic Transactions Martin Abraham Veronika Grimm Christina Meyer Michael Seebauer Friedrich-Alexander-Universität Erlangen-Nürnberg conference on 'Game Theory and Society' July 2011

2 Research Question Relevance Most economic transactions entail information problems e.g. about the behavior of the exchange partner Reputation is one mechanism to solve the problem, empirical research shows that reputation works if it exits However We have scarce knowledge how reputational information comes into being The production of reputation may be hampered by problems due to missing incentives or missing information Research question How does reputation emerge in economic transactions? We restrict our research on reputation in informal social networks (and not in institutionalized reputation systems) and consider potential costs

3 Theoretical framework and modeling Theoretical framework: economic transaction if information on the transaction with B is passed on from A X to A y emergence of reputation A x A y B potential reputation effects 3

4 Hypotheses Type of information transfer Different forms of information transfer possible Subjective (=qualitative) information about an actor s behavior (satisfied unsatisfied) Objective (=quantitative) information about an actor s behavior information by mentioning the exact amounts an economic transaction entails Subjective information can summarize all past experience of an actor less need to communicate in total Objective information: every bit of information is needed to form the complete picture higher frequency of information transfer Hypothesis 1: The probability of information transfer is higher over time if buyers A communicate the actual results of an transaction instead of submitting subjective information. 4

5 Hypotheses Rational actor Rational individuals act by considering costs and benefits Willingness to cooperate should be influenced by potential costs Hypothesis 2: If information transfer is free of charge information transfer is supposed to be higher than if it is costly. 5

6 Hypotheses Interactions between buyers Buyers A x and A y interact by exchanging information Buyer A x might provide resources for another buyer A y, not knowing if he receives any resources over time Decision to pass on information under uncertainty Opportunity of information transfer = potential (social) exchange Reciprocity as mechanism to solve incentive problems Hypothesis 3: The probability to pass on information rises if buyer A x received information by any buyer A i instead of receiving no information. 6

7 Experimental design Stage I: Trust game Eight participants in one group Repeated interactions in changing pairs for 36 periods Four actors are assigned the role of buyer A and seller B, respectively (participants keep their roles throughout the experiment) Players are labeled in their groups (buyers: A1-A4, seller: B1-B4) Initial endowment of 10 ECU for both buyer A and seller B Buyers can pass on any integer amounts between 1-10 ECU Sellers can return any amount they have received Participants get informed about their individual transfers 7

8 Experimental design Stage II: Information transfer After the trust game buyers have the opportunity to pass on information to one randomly chosen other buyer In each round a buyer can send one message and can receive between 0 and 3 messages about the performance of the seller If information is passed on: emergence of reputation Which conditions and parameters influence the emergence of reputation in social networks? 8

9 Experimental design Stage I: Trust game A x ax r B A: buyers B: seller x: transfer (x= 1,2 10) ax: multiplied return to B i Stage II: Information Transfer (a=3) r: given return to A i: potential transfer of information to another buyer A y A y 9

10 Experimental design Treatments SUB: The buyer can rate the seller s behavior on a 5-item-Likertscale ( very satisfied to very unsatisfied ) and pass on this information to a randomly selected buyer. OBJ: The buyer can pass on information on the sent amount and the received return to a randomly selected buyer NC: Passing on Information between A s ist costless (c=0) C: Passing on information costs 1 ECU (c=1) BASE : Trust game, no information transfer In all treatments Buyer could not lie The recipient of information learned who the sender of information was Buyer who did not receive information were not informed about the identity of the potential sender 10

11 Sampling Conduction All experimental sessions are computerized using z-tree (Fischbacher 2007) Experiments were conducted at the Cologne Laboratory for Experimental Research (CLER) in January 2010 and the Laboratory of Experimental Research Nuremberg (LERN) in August/September 2010 In total: 288 participants (192 participants in Treatment 1-4) Six independent observations per treatment Sessions lasted approximately 90 minutes (less in the baseline treatment) Average earnings ranged from Euro (Treatment Base) to Euro (Treatment QUANT, c=0). Average: Euro

12 Results What is the effect of reputation? TRUST (x) TRUSTWTH (r) Average Profit Buyers Average Profit Sellers OBJ_NC OBJ_C SUB_NC SUB_C BASE

13 Results SUB OBJ SUB OBJ 13

14 Results Multilevel mixed-effects logistic regression Reference: T_OBJ_NC Coef Std. Err. T_SUB_NC (0.669) T_SUB_C *** (0.674) T_OBJ_C *** (0.667) Period *** (0.011) Period x T_SUB_NC *** (0.015) Period x T_SUB_C *** (0.019) Period x T_OBJ_C *** (0.017) x (Trust) 0.37 ** (0.112) x ** (0.009) rate of return (x/r) *** (0.363) rate of return * (0.159) reciprocity 0.60 ** (0.120) _cons 3.94 *** (0.557) 14

15 Results Emergence of reputation is driven by - Low (no) costs -> reputation seems to be (extremely) sensitive to costs - The characteristics of information: objective information is better than subjective information especially in case of no costs - Reciprocity seems to be a strong determinant for the emergence of reputation Theoretical implications - Actors behave rational in respect to costs - Reputation has a social production function in respect to reciprocity 15

16 Outlook Further treatments Competition between buyers Eliminating learning effects by making the sellers anonymous Comparison with online reputation mechanisms: making information available to all buyers Further data collection: Validation with field data (probably: factorial survey) Research on the emergence of reputation in clusters of business partners Co-operation with the Institute for Employment Research (IAB) 16

17 Thank you for your attention!

18 Appendix Literature Abraham, M., 2001: Die Rolle von Vertrag, Macht und sozialer Einbettung für wirtschaftliche Transaktionen. Das Beispiel des Zahlungsverhaltens. Kölner Zeitschrift für Soziologie und Sozialpsychologie 53(1): Akerlof, G., 1970: The Market for "Lemons": Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics: Berg, J., J. Dickhaut & K. Mccabe, 1995: Trust, reciprocity, and social history. Games and Economic Behavior 10(1): Bolton, G., E. Katok & A. Ockenfels, 2004: How Effective are Electronic Reputation Mechanisms? An Experimental Investigation. Management Science 50(11): Burt, R.S., 2005: Brokerage and Closure. Oxford, University Press. Buskens, V. & J. Weesie, 2000: An Experiment on the Effects of Embeddedness in Trust situations: Buying a Used Car. Rationality and Society 12(2): Camerer, C. & K. Weigelt, 1988: Experimental Tests of a Sequential Equilibrium Reputation Model. Econometrica: Journal of the Econometric Society: Coleman, J., 1990: Foundations of Social Theory, Belknap Press. Diekmann, A. & D. Wyder, 2002: Vertrauen und Reputationseffekte bei Internet-Aktionen. Kölner Zeitschrift für Soziologie und Sozialpsychologie 54(2002): Ellickson, R., 1991: Order Without Law: How Neighbors Settle Disputes, Harvard Univ Pr. Fombrun, C. & M. Shanley, 1990: What's in a Name? Reputation Building and Corporate Strategy. Academy of Management Journal: Gächter, S. & A. Falk, 2002: Reputation and Reciprocity: Consequences for the Labour Relation. The Scandinavian Journal of Economics:

19 Appendix Granovetter, M., 1985: Economic Action and Social Structure: The Problem of Embeddedness. American Journal of Sociology 91(3): Kollock, P., 1999: The Economies of Online Cooperation. Communities in cyberspace: 220. Kreps, D.M. & R. Wilson, 1982: Reputation and Imperfect Information. Journal of Economic Theory 27: Milgrom, P. & J. Roberts, 1982: Predation, Repuation and Entry Deterrence. Journal of Economic Theory 27( ). Rabe-Hesketh, S. & A. Skrondal, 2008: Multilevel and Longitudinal Modeling Using Stata, Stata Corp. Rooks, G., W. Raub, R. Selten & F. Tazelaar, 2000: How Inter-firm Co-operation Depends on Social Embeddedness: A Vignette Study. Acta Sociologica 43(2): Roth, A. & F. Schoumaker, 1983: Expectations and Reputations in Bargaining: An Experimental Study. The American Economic Review: Schwalbach, J., 2001: Unternehmensreputation als Erfolgsfaktor. Diskussionspapier des Instituts für Management an der Humboldt-Universität. Berlin. Sommerfeld, R., H. Krambeck & M. Milinski, 2008: Multiple Gossip Statements and their Effect on Reputation and Trustworthiness. Proceedings of the Royal Society B: Biological Sciences 275(1650): Sommerfeld, R., H. Krambeck, D. Semmann & M. Milinski, 2007: Gossip as an Alternative for Direct Observation in Games of Indirect Reciprocity. Proceedings of the National Academy of Sciences 104(44): Uzzi, B., 1996: The Sources and Consequences of Embeddedness for the Economic Performance of Organizations: The Network Effect. American Sociological Review 61(4): Williamson, O.E., 2006: Calculativeness, Trust, and Economic Organization. S in: R. M. Kramer (Hrsg.), Organizational Trust. New York: Oxford University Press. 19

20 Experimental design Economic transaction modeled with a Trust Game Trust Game (Berg et al. 1995) a common design to study trust, trustworthiness, and the impact of reputation mechanisms Experimental design: - Two players, buyer A and respondent B, both initially endowed with 10 ECU - Buyer A can decide to send part or all of his endowment to the seller - Seller B receives the tripled amount A had sent to him and decides how much of the tripled amount he sends back to A Game theory prediction: no investment done by buyer A due to his expectation to receive no return from seller B Evidences from experiments do not confirm this theoretical prediction 20

21 Appendix Three-level variance-components models model specification (according to Rabe-Hesketh & Skondal 2008:436f) y ijk = β 1 + ζ jk (2) + ζ k (3) + ε ijk

22 Experimental design Stage I: Trust game A ax r B A: buyer B: seller x: transfer (x= 1,2 10) ax: multiplied return to B (a=3) r: given return to A 22