Engineering Trust in Markets: Advice and Reputation

Principal Investigators: Axel Ockenfels, Gary Bolton, Roman Inderst

Many markets are plagued by moral hazard and adverse selection problems, and so require trust in order to function effectively. In this project, we study how advice and reputation promote trust - taking into account the cognifive limits and social motivations of market participants. We start with the observation that traders with limited information often rely on expert advice. E.g., many retail investors seek financial advice, which however may be compromised by a conflict of interest with the advisor. In the first subproject, we aim to better understand the determinants of trust in and reliance on advice concerning credence and experience goods, mostly in the context of financial markets. However, trust is also a challenge for Internet consumer markets, where trading is typically anonymous, geographically dispersed, and executed sequentially. In such markets, advice often comes from reputation-based 'feedback systems' that enable traders to publicly share information about past transaction partners. Here too, advice is often distorted due to strategic, cognitive and social effects. In our second subproject, we study how reputation information is and should be produced and communicated in a moral hazard situation. By invesfigating manipulations of market information and communication processes, our research can guide market architects (such as regulators and internet market owners) in engineering trust.