Reputation in the Long-Run

Abstract

Feedback scores in an online marketplace have risen sharply over time, leading to substantial top-censoring. Some of the increase is explained by more satisfied raters, but at least 35-45% is attributable to raters applying lower standards. We show that this “reputation inflation” is the equilibrium outcome of a model in which (a) inferences made by future trading partners determine what constitutes “bad” feedback and (b) giving “bad” feedback is costly to raters. The introduction of a new feedback system confirms our model predictions: raters were candid when feedback was private, but when feedback suddenly became public, reputations began inflating.