Improving the Lemons Market with a Reputation System : An Experimental Study of Internet Auctioning

Three experiments examined the role of reputation for alleviating the lemons problem in an online market, and produced the following findings. First, information asymmetry drives the experimental market into a lemons market. Second, reputation about other traders moderately alleviates the lemons problem. Third, the power of reputation as a solution to the problem of lemons is substantially reduced when traders can freely change their identities and cancel their reputations. Fourth, the negative reputation system is particularly vulnerable to identity changes. It was argued that the lack of a closed market among online traders, which appears, at first grant, to be a formidable problem, can actually be a blessing.

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