3.1.2 Lab Studies

An increasing number of experimental studies also aim to shed light on how people react to reputation mechanisms [27, 28, 29, 30, 33]. Again, most studies relate to systems that are similar to eBay. Important themes in experimental studies include:

• The relative importance of positive vs. negative reputation
• The power of reputation relative to that of stable partnerships. In theory, under the assumption of perfect public monitoring of transaction outcomes, reputational incentives ought to lead to similar levels of cooperation as stable partnerships. Lab studies have tested this assumption in practice [27, 33]. The initial results are conflicting. One study [27] found that subjects tend to cooperate less in environments where traders change partners, but observe each partner’s past history than in environments where stable partnerships are formed. Another study [33] did not find significant difference in cooperation levels in the two settings.
• The dual role of reputation as sanctioning and signaling. An accumulated reputation acts as a signal to buyers about whether the seller is likely to be trustworthy in the current round. If sellers are not strategic, it provides information about their underlying quality level. Even if they are acting strategically (providing better goods or service when the incentives warrant it), the past reputation may separate sellers who have an incentive to act better or worse in the current round. In these cases, feedback is also acting as a sanctioning mechanism: the seller’s expectation that the future value of receiving feedback in this round is sufficient to incent good behavior in this round. Thus, depending on whether sellers have a fixed underlying quality or whether they vary their quality depending on incentives, reputation acts either as signal only or as both signal and sanction.
  Lab studies can determine the extent to which buyers believe that feedback works through sanctioning or only through signaling. When it works only through signaling, the signals are more precise the more feedback that has accumulated. When it works through sanctioning as well, however, a seller should be more attentive to the feedback they are about to receive when they have not yet accumulated much. Through experiments, researchers can observe whether buyers attribute greater trustworthiness to sellers who have a lot of feedback, but may not care much about the next one they receive, or whether they attribute greater trustworthiness to sellers who do not yet have a lot of feedback and thus should care more about their feedback from the current transaction.