The impact of fraud on reputation systems

Reputation systems can mitigate opportunistic behavior and improve efficiency on online marketplaces. However, rating fraud is a major problem on many websites. We experimentally investigate the circumstances under which rating fraud undermines the functioning of a reputation system and reduces efficiency. We find that the ability to manipulate feedback received from others generally reduces the reliability of displayed ratings compared to a control treatment where rating fraud is not possible. When manipulation is possible and costless, rating fraud is widespread, ratings become less reliable, expectations are lower, and efficiency is significantly reduced. However, when there is a cost to manipulation, there is less fraud, ratings are more reliable and efficiency increases, even when the cost is comparatively low.