Second-chance offers and buyer reputation systems: theory and evidence on auctions with default

Winners in online auctions frequently fail to complete purchases. Major auction platforms therefore allow "second-chance" offers (the runner-up bidder pays his own bid price) and let sellers leave negative feedback on buyers who default. We show theoretically that (i) all else equal, the availability of second-chance offers reduces bids; (ii) sellers have no incentive to exclude bidders, even if they are nearly certain to default; (iii) buyer reputation systems reward bidders known to default with a positive probability. Our experiments show that the economic forces identified in the theoretical model are important enough to have predictive power for bidder behavior.