Abstract
This paper presents the concepts of moral hazards and adverse selection in the reusable goods market on the Internet. In the case of asymmetric information, for example, one party might have more information on the goods in a particular transaction than the other party. The moral hazard situation happens when the party with more information about the transaction has some incentive to behave inappropriately, from the perspective of the party with less information. This can be observed on the Internet as well. Adverse selection has been explained very well in Akerlof′s article, The Market for Lemons, where he concludes that owners of good cars will opt out of putting their cars on the used car market. This is because buyers do not get information on the quality of the cars. Buyers then, tend to estimate the quality as average so only lower quality cars can be sold there. In the paper, we show reputation systems that aim to avoid the problems of moral hazard and adverse selection, and also touch upon issues such as “faked” rates and evaluations within reputation systems. Finally, we briefly introduce our study on designing an auction mechanism under asymmetric information on the quality of goods among experts and amateurs.
