More Trusting, Less Trust? An Investigation of Early E-Commerce in China

Trust is vital for market development, but how can trust be enhanced in a marketplace? A common view is that more trusting may help to build trust, especially in less developed economies. In this paper, we argue that more trusting may lead to less trust. We set up a rational expectation model in whi...

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Bibliographic Details
Published in:NBER Working Paper Series 2013-04, p.18961
Main Authors: Cai, Hongbin, Jin, Ginger Z, Liu, Chong, Li-An, Zhou
Format: Article
Language:English
Subjects:
Cheating
Consumer protection
Economic theory
Electronic commerce
Equilibrium
Expected utility
Purchasing
Reputations
Studies
Trust
Online Access:Get full text
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Summary:Trust is vital for market development, but how can trust be enhanced in a marketplace? A common view is that more trusting may help to build trust, especially in less developed economies. In this paper, we argue that more trusting may lead to less trust. We set up a rational expectation model in which a marketplace uses buyer protection to promote buyer trusting. Our results show that buyer protection may reduce trust in equilibrium and even hinder market expansion because it triggers differential entry between honest and strategic sellers and may induce more cheating from strategic sellers. Using a large transaction-level data set from the early years of Eachnet.com (an eBay equivalent in China), we find evidence that is consistent with the model predictions. Stronger buyer protection leads to less favorable evaluation of seller behavior and is associated with slower market expansion. These findings suggest that a trust-promoting policy aiming at buyer trusting may not be effective if it is not accompanied by additional incentives to improve seller trustworthiness.
ISSN:0898-2937
DOI:10.3386/w18961