Identity Management and Tradable Reputation

Abstract

Online anonymity has posed a significant threat on online reputation mechanisms and online identity management. How to improve the reliability and effectiveness of online reputation has thus become an important question of theoretical and practical interest. We examine a reputation market in an infinite repeated game setting, where agents sell online services and trade their online reputations. Agents exert effort to provide services and high type agents have a lower cost of effort than low types. An auditor performs random checks on services and determines agents' reputations. Our analysis depicts a full equilibrium in the reputation system with audit, including separating, partial separating, and pooling equilibrium under different conditions. In particular, we show that full separation can arise as an equilibrium such that high-type agents can be sorted out from low-type agents by their reputations, which is in contrast to Tadelis (2002). In a separating equilibrium, reputations become a perfect indicator of agents' types, effort levels, and quality of the services. By proposing online reputations as an asset, our paper generates implications for establishing reliable online environments and promoting online interactions.