Steve Tadelis - Published/Accepted Papers


Reputation and Feedback Systems in Online Platform Markets

Annual Review of Economics, Vol. 8, September 2016, pp. 321-340.

ABSTRACT

Online marketplaces have become ubiquitous as sites like eBay, Taobao, Uber and AirBnB are frequented by billions of users regularly. The success of these marketplaces is attributed not only to the ease in which buyers can find sellers, but also because they provide reputation and feedback systems that help facilitate trust. I begin by briefly describing the basic ideas of how reputation helps facilitate trust and trade, and offer an overview of how feedback and reputation systems work in online marketplaces. I then describe the literature that explores the effects of reputation and feedback systems on online marketplaces, and highlight some of the problems of bias in feedback and reputation systems as they appear today. I discuss ways to address these problems in order to improve the practical design of online marketplaces and suggest some directions for future research.

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Returns to Consumer Search: Evidence from eBay

(with Tom Blake and Chris Nosko)

17th ACM Conference on Electronic Commerce, (EC 2016), June 2016, pp. 531-545.

ABSTRACT

A growing body of empirical literature finds that consumers are relatively limited in how much they search over product characteristics. We assemble a dataset of search and purchase behavior from eBay to quantify the returns, and thus implied costs, to consumer search on the internet. The extensive nature of the eBay data allows us to examine a rich and detailed set of questions related to search in a way that previous structural models cannot. In contrast to the literature, we find that consumers search a lot: on average 36 times per purchase over 3 (distinct) days, with most sessions ending in no purchase. We find that search costs are relatively low, in the region of 25 cents per search page. We pursue the analysis further by, i) examining how users refine their search, ii) how search behavior spans multiple search sessions, and iii) how the amount of search relates to finding lower prices. JEL classifications: D43, D83, L13.

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Canary in the e-Commerce Coal Mine: Detecting and Predicting Poor Experiences Using Buyer-to-Seller Messages

(with Dimitriy V. Masterov and Uwe F. Mayer)

16th ACM Conference on Electronic Commerce, (EC 2015), June 2015, pp. xxx-yyy.

ABSTRACT

Reputation and feedback systems in online marketplaces are often biased, making it difficult to ascertain the quality of sellers. We use post-transaction, buyer-to-seller message traffic to detect signals of unsatisfactory transactions on eBay. We posit that a message sent after the item was paid for serves as a reliable indicator that the buyer may be unhappy with that purchase, particularly when the message included words associated with a negative experience. The fraction of a seller's message traffic that was negative predicts whether a buyer who transacts with this seller will stop purchasing on eBay, implying that platforms can use these messages as an additional signal of seller quality.

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Is Sniping A Problem For Online Auction Markets?

(with Matt Backus, Tom Blake, and Dimitriy V. Masterov)

Proceedings of the 24th ACM International World Wide Web Conference (WWW24), May 2015, pp. 88-96.

ABSTRACT

A common complaint about online auctions for consumer goods is the presence of "snipers," who place bids in the final seconds of sequential ascending auctions with predetermined ending times. Roth and Ockenfels (2002) and Bajari and Hortacsu (2003) conjecture that snipers are best-responding to the existence of "incremental" bidders that bid up to their valuation only as they are outbid. Snipers aim to catch these incremental bidders at a price below their reserve, with no time to respond. As a consequence, these incremental bidders may experience regret when they are outbid at the last moment at a price below their reservation value. We measure the effect of this experience on a new buyer's propensity to participate in future auctions. We also consider an alternative explanation, rooted in the behavioral literature on the endowment effect. Bidders may gradually develop an attachment to the object while they are the high bidder, implying that the regret should increase with time spent in the lead. We show that the two narratives are econometrically separable, and estimate them using a carefully selected subset of auctions from eBay.com.

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Information Disclosure as a Matching Mechanism: Theory and Evidence from a Field Experiment

(with Florian Zettelmeyer)

American Economic Review 2015, 105(2):886-905

ABSTRACT

Market outcomes depend on the quality of information available to the market's participants. We measure the effect of information disclosure on market outcomes using a large-scale field experiment that randomly discloses information about quality in wholesale automobile auctions. We argue that buyers in this market are horizontally differentiated across cars that are vertically ranked by quality. This implies that information disclosure helps match heterogeneous buyers to cars of varying quality, causing both good and bad news to increase competition and revenues. Our empirical analysis confirms these hypotheses. These findings have implications for the design of other markets, including e-commerce, procurement auctions, and labor markets. JEL classi cations C93, D44, D82, L15 

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Consumer Heterogeneity and Paid Search Effectiveness: A Large Scale Field Experiment

(with Tom Blake and Chris Nosko)

Econometrica 2015, 83(1):155-174

ABSTRACT

Internet advertising has been the fastest growing advertising channel in recent years with paid search ads comprising the bulk of this revenue. We present results from a series of large-scale eld experiments done at eBay that were designed to measure the causal e ectiveness of paid search ads. Because search clicks and purchase intent are correlated, we show that returns from paid search are a fraction of non-experimental estimates. As an extreme case, we show that brand-keyword ads have no measurable short-term bene ts. For non-brand keywords we nd that new and infrequent users are positively in uenced by ads but that more frequent users whose purchasing behavior is not in uenced by ads account for most of the advertising expenses, resulting in average returns that are negative. JEL classi cations C93, D44, D82, L15 

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Harnessing Naturally-Occurring Data to Measure the Response of Spending to Income

(with Michael Gelman, Shachar Kariv, Matthew D. Shapiro, and Dan Silverman)

Science 2014, 345(6193):212-215

ABSTRACT

This paper presents a new data infrastructure for measuring economic activity. The infrastructure records transactions and account balances yielding measurements with scope and accuracy that have little precedent in economics. The data are drawn from a diverse population that overrepresents males and younger adults, but contains large numbers of underrepresented groups. The data infrastructure permits evaluation of a benchmark theory in economics that predicts that individuals should use a combination of cash management, saving, and borrowing to make the timing of income irrelevant for the timing of spending. As with previous studies and in contrast with the predictions of the theory, there is a response of spending to the arrival of anticipated income. The data also show, however, that this apparent excess sensitivity of spending results largely from the coincident timing of regular income and regular spending. The remaining excess sensitivity is concentrated among individuals with less liquidity.

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Bidding for Incomplete Contracts: An Empirical Analysis of Adaptation Costs

(with Patrick Bajari and Stephanie Houghton),

American Economic Review 2014, 104(4):1288-1319

ABSTRACT

Procurement contracts are often renegotiated because of changes that are required after their execution. Using highway paving contracts we show that renegotiation imposes significant adaptation costs. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs are an important determinant of their bids. A structural empirical model compares adaptation costs to bidder markups and shows that adaptation costs account for 8-14 percent of the winning bid. Markups from private information and market power, the focus of much of the auctions literature, are much smaller by comparison. Implications for government procurement are discussed. JEL classifications: D23, D82, H57, L14, L22, L74.

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Public Procurement Design: Lessons from the Private Sector

International Journal of Industrial Organization, 2012, 30(3):297-302

ABSTRACT

Public procurement regulations put constraints on the contracts and award mechanisms that public procurement agencies can use. These constraints are not present in the private sector, and recent studies suggest that the added flexibility in private sector procurement offers efficiency advantages. This paper offers a short progress report of these recent studies, and argues for the need to enhance the tools that are currently at the disposal of public sector procurement offices.

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A Theory of Moral Persistence: Crypto-Morality and Political Legitimacy

(with Avner Greif)

Journal of Comparative Economics 2010, 38(3):229-244 ,

ABSTRACT

Why, how, and under what conditions do moral beliefs persist despite institutional pressure for change? Why do the powerful often fail to promote the morality of their authority? This paper addresses these questions by presenting the role of crypto-morality in moral persistence. Crypto-morality is the secret adherence to one morality while practicing another in public. A simple overlapping generations model is developed to examine the conditions under which crypto-morality is practiced, decays and influences the direction of moral change. We demonstrate the empirical relevance of crypto-morality by discussing the moral foundations of political legitimacy in various historical episodes.

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Contracting for Government Services: Theory and Evidence from U.S. Cities

(with Jonathan Levin)

Journal of Industrial Economics, 2010, 58(3):507-541

ABSTRACT

Local governments can provide services with their own employees or by contracting with private or public sector providers. We develop a model of this “make-or-buy” choice that highlights the trade-off between productive efficiency and the costs of contract administration. We construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions. Our analysis suggests an important role for economic efficiency concerns, as well as politics, in contracting for government services. JEL codes: D23, D73, H11, L33.

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Auctions versus Negotiations in Procurement: An Empirical Analysis

(joint with Patrick Bajari and Robert McMillan)

Journal of Law, Economics and Organization, 2009, 25(2):372-399

ABSTRACT

Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we consider several possible determinants that may influence the choice of auctions versus negotiations. We then examine a comprehensive data set of private sector building contracts awarded in Northern California during the years 1995-2000. The analysis suggests a number of possible limitations to the use of auctions. Auctions may perform poorly when projects are complex, contractual design is incomplete and there are few available bidders. Furthermore, auctions may stifle communication between buyers and sellers, preventing the buyer from utilizing the contractor's expertise when designing the project. Some implications of these results for procurement in the public sector are discussed. JEL classifications: D23, D82, H57, L14, L22, L74.

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Seller Reputation

(with Heski Bar-Isaac)

Foundations and Trends in Microeconomics, 2008, 4(4):273-351

ABSTRACT

Seller reputation is an important asset because buyers often chooses sellers on the basis of their reputation. This is particularly true when the quality of the good or service transacted are hard to measure and the parties cannot perfectly contract on the outcome of the transaction. As a consequence, the seller will be mindful of building and maintaining a good reputation through the information that buyers have about the seller, including previous transactions and the reports of other buyers. We introduce a unifying framework that embeds a number of different approaches to seller reputation, incorporating both hidden information and hidden action. We use this framework to stress that the way in which consumers learn affects both behavior and outcomes. In particular, the extent to which information is generated and socially aggregated determines the efficiency of markets. After reviewing these theoretical building blocks we discuss several applications and empirical concerns. We highlight that the environment in which a transaction is embedded can help determine whether the transaction will occur and how parties will behave. Institutions, ranging from the design of online markets to norms in a community, can be understood as ensuring that concerns for reputation lead to more efficient outcomes. Similarly, the desire to affect consumer beliefs regarding the firm’s incentives can help us understand strategic firm decisions that seem unrelated to the particular transactions they wish to promote. We conclude by considering slightly different models of reputation that lie beyond the scope our framework, briefly reviewing the somewhat sparse empirical literature and highlighting and suggesting future directions for research.

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The Innovative Organization: Creating Value Through Outsourcing

California Management Review 2007, 50(1):261-277
ABSTRACT

Few recent business trends have received as much attention as the practices of outsourcing and offshoring. Many cases of failed outsourcing contracts suggest that the strategic use of outsourcing may not be as beneficial as some believed, and hidden costs are often cited as a main source of failure. A business leader can successfully innovate the sourcing practices of his organization by employing strategic frameworks that will anticipate the hidden costs of outsourcing. This article offers such a framework, and argues for its wide use.

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Profit Sharing and the Role of Professional Partnerships

(with Jonathan Levin)

Quarterly Journal of Economics 2005, 120(1):132-172

ABSTRACT

When it is hard to assess product quality, firms will sub-optimally hire low ability workers. We show that organizing as a profit-sharing partnership can alleviate these problems. Our theory explains the historical prevalence of profit sharing in professional service industries such as law, accounting, medicine, investment banking, architecture, advertising, and consulting, and the relative scarcity of profit sharing in other industries. It also sheds light on features of partnerships such as up-or-out promotion systems, and on recent trends in professional service industries.( JEL codes: D20, D82, J33, J44, J54, L22.

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Firm Reputations with Hidden information

Economic Theory 2003, 21(2-3):635-651
ABSTRACT

An adverse selection model of firm reputation is developed in which short-lived clients purchase services from firms operated by overlapping generations of agents. A firm's only asset is its name, or reputation, and trade of names is not observed by clients. As a result, names are traded in all equilibria regardless of the economy's horizon, and the general equilibrium analysis links the value of a name to the market for services. This link causes a non-monotonicity that precludes higher types from sorting themselves through the market for names and leads to "sensible" dynamics: reputations, and name prices, increase after a success and decrease after a failure. (JEL C70, D80, L14)

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The Market for Reputations as an Incentive Mechanism

Journal of Political Economy August 2002, 92(2):854-882

ABSTRACT

Reputational career concern provide incentive for short lived agent to work hard, but it is well known that these incentive disappear as an agent reaches retirement. This paper investigates the effect of a market for firm reputation on the life-cycle incentives of firm owners to exert effort. A dynamic general equilibrium model with moral hazard and adverse selection generates two main results. First, incentives of young and old agents are quantitatively equal, implying that incentives are "ageless" with a market for reputations. Second, good reputations cannot act as effective sorting devices: in equilibrium, more able agent cannot outbid lesser ones in the market for good reputations. In addition, welfare analysis shows that social surplus can fall if clients observe trade in firm reputation. (JELC70, D82, L14, L15)

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Complexity, Flexibility, and the Make-or-Buy Decision

American Economic Review Papers and Proceedings May 2002, 92(2):433-437

ABSTRACT

65 years ago, Ronald Coase (1937) asked what determines whether production will be organized in a firm or through the market, later coined the "make-or-buy" decision. This question was put center stage by Oliver Williamson (1975, 1985) who further developed Transaction Costs Economics(TCE), arguing that incomplete contracts and specific relationships overshadowed by opportunism, asymmetric information and bounded rationality, will lead vertical processes to integrate. Benjamin Klein et al. (1978) enhanced TCE with the "hold-up" problem: in the face of incomplete contracts, specificity and opportunistic behavior, integration can help promote ex ante investment incentives. Sanford Grossman and Oliver Hart (1986) (followed by Hart and John Moore (1990)) developed the Property Rights Theory (PRT) of the firm (See Hart, 1995). PRT formally model the hold-up problem, offered a precise definition of integration via ownership and residual control rights, and analyzed the costs and benefits of integration in a unified manner. However, PRT narrowed the focus of the make-or-buy question on one type of transaction cost - the hold up problem. This paper focuses attention on a different kind of transaction cost: haggling and friction due to ex post changes and adaptations when contracts are incomplete. The level of a transaction's complexity, which is associated with contractual incompleteness, will be the shifting parameter that determines both incentive schemes and integration decisions. This focus is motivated by a careful examination of procurement decisions in industry, and has strong empirical content since the exogenous shifter (complexity) seems easier to measure than specificity.

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Incentives Versus Transaction Costs: A Theory of Procurement Contracts

(with Patrick Bajari)

RAND Journal of Economics Autumn 2001, 32(3):287-307

ABSTRACT

Inspired by facts from the private-sector construction industry, we develop a model that explains many stylized facts of procurement contracts. The buyer in our model incurs a cost of providing a comprehensive design and is faced with a tradeoff between providing incentives and reducing ex post transaction costs due to costly renegotiation. We show that cost-plus contracts are preferred to fixed-price contracts when a project is more complex. We briefly discuss how fixed-price or cost-plus contracts might be preferred to other incentive contracts. Finally, our model provides some microfoundations for ideas from Transaction Cost Economics.

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What's in a Name? Reputation as a Tradeable Asset

American Economic Review June 1999, 89(3):548-563

ABSTRACT

I develop a model in which a firm's only asset is its name, which summarizes its reputation, and study the economic forces that cause names to be valuable, tradeable assets. An adverse selection model in which shifts of ownership are not observable guarantees an active market for names with either finite or infinite horizons. No equilibrium exists in which only good types buy good names. The reputational dynamics that emerge from the model are more relistic than those in standard game-theoretic reputation models, and suggest that adverse selection plays a crutial role in understanding firm reputation.

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Pareto Optimality and Optimistic Stability in Repeated Extensive Form Games

Journal of Economic Theory 1996, 69(2):270-289

ABSTRACT

This paper extends the applications of the theory of social situations. In particular, we investigate characteristics of optimistic stable standards of behavior (OSSBs) in repeated extensive form games. The OSSB is interesting for two reasons: First, it refines subgame perfect equilibrium. Second, it strongly relates to von Neumann-Morgenstern abstract stable sets. We characterize the nondiscriminating OSSB, and derive a sufficient condition for the existence of a unique nondiscriminating OSSB - a condition that is independent of the discount factor, ë. Our main result shows that the nondiscriminating OSSB selects Pareto optimal subgame perfect equilibrium paths in a class of repeated games.