Third-Party Reviews and Quality Provision

This paper seeks to understand the relational factors that may affect the decisions of both third-party raters and service providers in a setting where service providers compete with one another. We employ laboratory economics experiments to examine how removing anonymity and allowing for repeated interactions between the rater and the service provider impact both the ratings assigned by the rater and the quality levels expended by the service provider. Our methodology enables us to observe the true quality level chosen by a service provider, which allows us to accurately detect any bias in the assessment of the third-party rater. The experimental results show that the decisions of both the rater and the service provider are very sensitive to the relational factors that govern their interaction. When the rater and the service provider know each other's identities, we observe a high proportion of overrating even though raters earn less monetary rewards for doing so, and the propensity to overrate is even stronger with repeated interactions. Furthermore, the service provider chooses low quality levels. We develop and estimate a model that captures the rater's psychological trade-off between remaining objective and helping the service provider compete in the marketplace, and the evolution of the service provider's beliefs about the rater's preferences.