Trust and Reputation in Markets

Abstract

Economic transactions are subject to trust problems, which can be solved by means of long-term business relations, by institutional regulations or by reputational incentives. In this chapter, we first deal with the trust problem and the various ways of its solution. We then discuss the functioning of the reputation mechanism in markets in historical and contemporary societies. Although similar mechanisms are at work in contemporary societies as in historical societies, the technologies available to communicate information about reputation have changed. This is particularly evident in online markets, in which electronic rating systems have become an essential element. In the third part of this chapter, we focus on the development, forms and consequences of reputation in online markets. Reputation information promotes cooperation in markets if it is credible. This requires that simple means of deception are unavailable. We conclude this chapter by dealing with the down side of reputation systems.