Arbitrary Inequality in Reputation Systems

Abstract

Trust is an essential condition for exchange. Large societies must substitute the trust traditionally provided through kinship and sanctions in small groups to make exchange possible. The rise of internet-supported reputation systems has been celebrated for providing trust at a global scale, enabling the massive volumes of transactions between distant strangers that are characteristic of modern human societies. Here we problematize an overlooked side-effect of reputation systems: Equally trustworthy individuals may realize highly unequal exchange volumes. We report the results of a laboratory experiment that shows emergent differentiation between ex ante equivalent individuals when information on performance in past exchanges is shared. This arbitrary inequality results from cumulative advantage in the reputation-building process: Random initial distinctions grow as parties of good repute are chosen over those lacking a reputation. We conjecture that reputation systems produce artificial concentration in a wide range of markets and leave superior but untried exchange alternatives unexploited.