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REPUTATION-BASED GOVERNANCE

Stanford University Press

Contents

Preface......................................................................................ix1 Introduction...............................................................................12 Reputation and Trust.......................................................................203 Reputation and Good Public Governance......................................................454 Entities, Roles, and Functions of Reputation-Based Governance..............................575 Computing Measures of Reputation...........................................................776 The Production of Statistical Information and the Analysis of Policies.....................927 Managing Policies: Accountability, Rent-Seeking, and Corruption............................1108 Applications of Reputation-Based Governance................................................1239 Interdependence Between the Choice and Execution of Policies...............................14410 Reputation-Based Democratic Participation.................................................16011 Final Considerations......................................................................176Notes........................................................................................183Bibliography.................................................................................199Index........................................................................................213

Chapter One

Today we work for a reputation. Tomorrow our reputation will work for us. Russian saying

EBay and Other Stories

EBay's electronic market is one of the most successful Internet applications, generating 15 million new listings on the average day and allowing more than 90 million users worldwide to buy and sell all sorts of new and secondhand items (eBay 2009, 2010). On eBay, traders almost invariably do not know each other and usually will not have an encounter more than once. It would be easy to cheat on eBay—for example, you could fail to send the merchandise after having received the requested payment, or send a product of lower value than the one advertised, or change your mind on a purchase and not follow it through. If dishonesty were widespread, people would not trust each other and would not use the market. Beyond a certain level of mutual mistrust, eBay would not function.

However, an essential characteristic of eBay prevents this from happening. At the end of a transaction, both buyer and seller may (and often do) write a "feedback" (as it is called) on each other, which can be positive, neutral, or negative. The sum of each type of feedback received by each participant during the previous six months forms what amounts to an "index of reputation" that is visible to all. The availability of such an index provides a strong incentive to be honest: a seller who receives negative feedbacks from previous buyers would find it difficult to continue trading, because prospective buyers would be wary of doing business with him. A buyer would also have a hard time doing his shopping, because sellers would not believe in his resolve. On eBay, fear of acquiring a bad reputation represents a strong incentive to be honest and efficient, and the observed outcome is that most people, in fact, honestly describe the merchandise that they plan to sell, ship it quickly, and pay their bills. The result is the success of eBay, one of the poster cases of the Internet age.

Beyond what may be concluded from impressionistic observations, rigorous studies have assessed the role of reputational effects, using data on eBay transactions together with appropriate econometric techniques. Resnick et al. (2006, table 1) summarize fifteen such studies. The broad picture that emerges is one where such effects exist and are relevant. More recent research also points in the same direction. For example, Resnick et al. (2006) set up an experiment where an established dealer with a good reputation is compared with a new dealer, with no reputation at all. They both provide exactly the same good and quality of ser vice. The authors find that the seller with an established reputation enjoys a significant price premium. Cabral and Hortaçsu (2010) find that when a seller receives a negative feedback for the first time, his sales drop significantly, and they conclude that overall "the eBay reputation system gives way to noticeable strategic responses from both buyers and sellers."

The case of eBay is a good starting point for our inquiry into the role of reputation in public governance. True, the outcome that we observe—a viable and thriving market— does not apply to public governance but to the private domain. It also turns out that there are more examples available of private governance where reputation plays an important role. One of the main theses of this book is that this divergence occurs precisely because the role of reputational considerations in public governance today is not as important as it could, and should, be. However, the eBay example does hint at two issues that we will encounter over and over again in our reasoning on public governance. First, reputational considerations may induce people to act in useful ways even without the presence of a formal institution threatening to punish them should they misbehave. What induces most users of eBay to be honest is not the fear of the police knocking at their door, should they cheat. For many, and possibly for most, an interiorized sense of honesty may certainly play a role in this respect. However, the presence of eBay's widely visible feedbacks, and their consequent reputational effects, has a much more compelling role in guaranteeing the viability of eBay as a marketplace.

Secondly, the success of eBay hinges upon the presence of a communication technology: Internet and the Web. In general, all solutions to governance problems need appropriate technologies in order to function. For example, the Roman Empire would not have existed as we know it without its network of roads and an efficient postal system, allowing the transmission of information and orders from the capital to the legions stationed in the provinces. Today's aviation technology, which permits, for example, government representatives to meet frequently, is an integral part of the system of international relations. In the case of eBay in par tic u lar, the Internet is used to transmit information on the reputation of traders. Also, the eBay case illustrates that this reputational information typically has to be appropriately organized: though individual comments that people post on concluded transactions are accessible to all, it is the aggregation of information provided by a reputation index that is most useful.

We should exercise care when considering the role of technology within a governance model. If the Internet, or something similar to it, were not available, eBay could not exist. However, while being able to record information and to communicate is indispensable for reputation to play a role, obviously reputation information can also spread using different and much less sophisticated technologies. The following description of a well-studied historical episode serves as a convincing example of the relevance of informal reputation considerations in very different technological contexts.

In the...