Trust is essential for all sorts of transactions, and how to set up institutions to promote trust and trustworthiness in the marketplace is a big concern of market design.
It is even a big concern of armies trying to win the hearts and minds of a population in the face of a guerrilla insurgency. There's a very interesting essay in the Washington Post about earning, maintaining and restoring trust, by Admiral Mike Mullen, the Chairman of the Joint Chiefs of Staff: Building Our Best Weapon.
On a more technical note, I'm reading Community Structure and Market Outcomes: Towards a Theory of Repeated Games in Networks by Itay Fainmesser (who you can try to hire next year). He is interested how patterns of connections between buyers and sellers can promote trustworthy behavior through repeated play, and how the effort to achieve trust in the marketplace by engaging in long term relationships may exclude some parties from the market. In this connection he writes "...repeated interactions cannot perfectly substitute for institutions..."
The kinds of institutions he is thinking of are both legal (if you can sue me for non-performance, this makes it easier to trust me), and reputational (if you can give me a credible negative review that will impede my ability to transact in the future, this also makes it easier to trust me).
As it happens, I've also been reading about the recent redesign of eBay's reputational system: "ENGINEERING TRUST - RECIPROCITY IN THE PRODUCTION OF REPUTATION INFORMATION," - by Gary Bolton, Ben Greiner, and Axel Ockenfels. It is a very nice market design paper.
They describe some of the design concerns behind eBay's 2007 rollout of its new, more detailed feedback system, in which buyers are able to give some feedback on sellers anonymously. In particular, they describe how they and eBay became concerned that the old reputation system became less informative than it might have been, because the pattern of reciprocally positive feedback concealed underlying dissatisfactions. They describe how (both prospectively and retrospectively) they compared the relevant field data, and how laboratory experiments helped verify the intuitions gained in that way, and allowed them to see the efficiency effects of an improved reputation system.
It was nice to read Admiral Mike Mullen’s article and I’m glad that he is talking about building and maintaining trust. At the same time it makes me really sad because like their Pakistani counterparts American generals have failed to understand the problem. Americans can never win the trust of Pakistan unless people of Pakistan start trusting them. It was interesting to read that Admiral Mullen tries to visit Pakistan whenever he is in the region but that very move of the Admiral causes the mistrust. Pakistanis don’t particularly enjoy hosting American military’s top brass; the history hasn’t been very rosy with them. How nice it would have been if instead of men in uniform, chancellors or professors of the top universities had visited Pakistani universities. I’m sure the Pakistani youth would have appreciated it a lot more.
ReplyDeleteOver the last 4-5 years Americans did invest in the right direction, as the Fulbright program in Pakistan became the largest in the world. However, a lot more needs to be done to become one of the rarest treasures of history.
I apologies it wasn’t really related to the market design ….. Well may be it is.