Adverse Selection and Reputation in a World of Cheap Talk
29 Pages Posted: 12 Feb 2008 Last revised: 25 Feb 2008
Date Written: February 2008
Abstract
Internet message boards are inherently a world of cheap talk due to the anonymity of message authors. This paper investigates whether a pecuniary reputation system influences the adverse selection endemic to message boards. First, we find evidence that such a authors with high reputation scores are less likely to voluntarily offer a buy-hold-sell sentiment in a particular message. Second, we find that authors with no reputation at stake tend to be more bearish with their sentiment but, after controlling for selection, authors with more reputation at stake tend to be bullish in their sentiment. Third, we find that high-reputation authors tend to offer more accurate sentiments. Our results suggest that reputation, coupled with a small pecuniary reward system, can materially influence the adverse selection problem in a world of cheap talk.
Keywords: Internet message board, sentiment, pecuniary reward
JEL Classification: G14, D83
Suggested Citation: Suggested Citation
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