Designing Markets to Foster Communication and Cooperation

Abstract: Many markets rely on third-party punishment and reputation mechanisms to incentivize cooperation between buyers and sellers. This paper investigates when truthful communication on such platforms is incentive compatible. We find that communication incentives are difficult to support if each side has a myopic incentive to deviate, but easy to support if only one side has a myopic incentive to deviate. Accordingly, there are strong gains from structuring trade so that either one side moves first, or can use an enforcement intermediary to guarantee their cooperation.