Adverse Selection and Moral Hazard in Online Markets
Market Transparency, Adverse Selection, and Moral Hazard∗ Tobias J. Klein Christian Lambertz Konrad O. Stahl† June 2015 Abstract We study how an improvement in market transparency affects seller exit and continuing sell- ers’ behavior in a market setting that involves informational asymmetries. The improvement was achieved by reducing strategic bias in buyer ratings and led to a significant increase in buyer satisfaction with seller performance, but not to an increase in seller exit. When sellers had the choice between exiting—a reduction in adverse selection—and staying but improving behavior—a reduction in moral hazard—, they preferred the latter. Increasing market transparency led to better market outcomes. JEL classification: D47, D83, L15. Keywords: Anonymous markets, adverse selection, moral hazard, reputation mechanisms, market transparency, market design. ∗We would like to thank the participants of the 2013 ICT Workshop in Evora, the 2nd MaCCI day in Mannheim, the 11th ZEW ICT Conference, the 2013 EARIE conference in Evora, the Fifth Annual Conference on Internet Search and Innovation at the Searle Center in Chicago, the Eighth bi-annual Postal Economics conference on E-commerce, the conference on Digital Economy and Delivery services in Toulouse, the Fifteenth CEPR/JIE Conference on Applied Industrial Organization in Athens, seminar participants at Copenhagen, Hebrew, Tel Aviv and Tilburg universities, the DIW, Copenhagen Business School, and in particular, Ying Fan, Jin-Hyuk Kim, Shaul Lach, John List, Volker Nocke, Martin Peitz, David Reiley, Martin Salm, Steve Tadelis, John Thanassoulis and Stefan Weiergräber for helpful comments. Fabian Kosse provided excellent research assistance. We are grateful to the editor, Ali Hortaçsu, and two referees for very detailed comments, as well as to Michael Anderson and Yossi Spiegel for unusually detailed and insightful suggestions on how to improve an earlier version of this paper.
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