ICES Experimental Economics Brown Bag Lecture

The Efficiency of Escrow Mechanisms on Online Exchange

Thursday, April 1, 2021 12:00 PM to 1:00 PM
Online Location, Zoom Meeting

ICES Experimental Economics Brown Bag Lecture

The Interdisciplinary Center for Economic Science (ICES) presents an ICES Brown Bag Lecture featuring:

Sarah Sylvester

George Mason University

The Efficiency of Escrow Mechanisms on Online Exchange

 

Please contact ICES Office Manager (sbahabib@gmu.edu) for Zoom link.

 

Abstract

With the rise in online shopping in the 21st century have come more prospects for malicious trading behavior. Trust is often more difficult to achieve in online settings, as the good quality and seller identity are typically unascertainable. Fraud and opportunism are unable to be mitigated in certain online markets without the aid of additional mechanisms, including escrow. Introducing a third-party to facilitate transactions ensures offer safety, where both parties either fulfill or receive back their initial offers. This secures contracts, allowing more deals to occur while only adding a small cost to trading. Although various escrow mechanisms have been employed throughout history, only recently have they begun entering online marketplaces. To study the effects escrow has on online environments more closely, we design an experiment utilizing mTree software to analyze the efficiency of exchange. In this, one buyer and one seller attempt to negotiate the price of one good to be traded, through a modified Ultimatum Game. Three levels of escrow provide the different treatments and also mimic scenarios in various online markets: no escrow allowed, escrow during fulfillment only, and escrow during negotiations. While the experiment has not yet been run, variables within the experiment are being determined through simulations modeling Fehr-Schmidt preferences. We show that differing levels of inequality aversion greatly impact the strategic behavior, equilibrium price, and utility we can expect from participants.

 

For more information about the Brown Bag Lectures, please visit the Brown Bag Schedule homepage.

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