Market Transparency, Adverse Selection, and Moral Hazard

Abstract: 

We study the effects of improvements in market transparency on eBay on seller exit and

continuing sellers’ behavior. An improvement in market transparency by reducing strategic

bias in buyer ratings led to a significant increase in buyer valuation especially of sellers

rated poorly prior to the change, but not to an increase in seller exit. When sellers had

the choice between exiting—a reduction in adverse selection—and improved behavior—a

reduction in moral hazard—, they preferred the latter because of lower cost. Increasing

market transparency improves on market outcomes.