Adverse Selection and Reputation in a World of Cheap Talk

29 Pages Posted: 12 Feb 2008 Last revised: 25 Feb 2008

See all articles by Craig A. Depken

Craig A. Depken

University of North Carolina at Charlotte - The Belk College of Business Administration - Department of Economics

Ying (Clement) Zhang

University of Texas at Arlington

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

Depken, Craig A. and Zhang, Ying, Adverse Selection and Reputation in a World of Cheap Talk (February 2008). Available at SSRN: https://ssrn.com/abstract=1091224 or http://dx.doi.org/10.2139/ssrn.1091224

Craig A. Depken (Contact Author)

University of North Carolina at Charlotte - The Belk College of Business Administration - Department of Economics ( email )

Charlotte, NC 28223
United States

Ying Zhang

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

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