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The Impact of Rating Systems on Subcontracting Decisions: A Transaction Cost Analysis

TitleThe Impact of Rating Systems on Subcontracting Decisions: A Transaction Cost Analysis
Publication TypeTechnical Report
Year of Publication2003
AuthorsEkström, MA, Björnsson, HC, Kunz, J, Levitt, RE, Nass, CI
Date Published02/2003
Publication Languageeng
KeywordsBidding, Center for Integrated Facility Engineering, CIFE, E-Commerce, Electronic Commerce, Rating System, Stanford University, Transaction Costs, Trust
AbstractThis article investigates how different types of rating mechanisms can affect transaction costs in business-to-business electronic commerce. In consumer electronic marketplaces, where the asset-specificity of the transactions is generally low, simple unweighted rating mechanisms have been shown to increase trust and therefore also decrease the transactions costs associated with opportunistic behavior. However, we argue that if a reputation mechanism is to decrease the transaction costs for highly asset specific transactions, it is necessary that the rating mechanism account for the relationship between the user and the rater. To empirically validate this hypothesis, we created a prototype credibility-weighted rating tool that incorporates a methodology to calculate a weighted rating based on source credibility theory. In an experiment, industry practitioners evaluated bids from service providers using the credibility-weighted rating tool, as well as a standard unweighted tool. For transactions with low asset-specificity, the experiment showed that both types of tools influence the risk premium added to the bids. For highly asset specific transactions, on the other hand, the credibility-weighted ratings significantly influenced the added risk premium, while there was no evidence that the simple average ratings provided by the unweighted tool affected decision-making behavior.
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