Strategic utilization of information by firms and consumers

This dissertation consists of two chapters. In the first chapter, I show that the manner in which firms' quality ratings are displayed incentivizes firms to strategically take costly short-run actions that improve their ratings. Most review platforms display star ratings of goods and services rounded to a half star, rather than display the exact average rating. Since the true average rating is not shown, firms have an incentive to remain just above the rounding threshold in order to have a higher displayed rating. However, once a firm's rating passes the rounding threshold, their incentive to improve their ratings drops as their rating moves farther from the threshold. I study this phenomena in the context of auto repair. Consumers face significant uncertainty in the auto-repair market, which makes it a prime context in which to study reviews. I first show that consumers respond to ratings in this market. Firms with higher-displayed ratings have higher revenues and more customers than lower-rated firms. To identify the effects of ratings versus quality, I utilize a regression-discontinuity strategy. Since ratings have a significant effect on demand, firms have an incentive to pay attention to their ratings. Consistent with the firms working to strategically push their ratings past rounding thresholds and keep them above, I find that there is an excessive amount of bunching around ratings thresholds. The firms' actions toward improving their ratings are typically unobserved, but due to my novel data and the discontinuity of displayed ratings, I can model and infer firm behavior. Specifically, I provide evidence that firms change the services they provide and exert extra effort when they are close to rounding thresholds. Finally, I provide a theoretical framework in order to quantify the actions and provide optimal policies for firm actions depending on their rating and number of reviews. The second chapter is co-authored with Jessica Fong. This paper explores the impact of information avoidance on credit scores. Our research questions are, under what circumstances do individuals avoid information about their credit report, and how does avoiding this information affect their future credit score? Using data from a consumer finance platform, we find a causal link between demand for information and credit score trajectories. A decline in credit score decreases the likelihood that an individual views her credit report in the future, even for individuals with high credit scores. We then measure the impact of receiving information on one's future credit score. To obtain a causal estimate, we use variation in whether an individual views her credit report that is induced from email campaign A/B tests implemented by the firm. We find heterogeneous effects of information on credit scores. For those individuals who were more likely to avoid the information (users who were on a decreasing credit score trend), viewing their credit report further decreases credit scores. Individuals who were on a flat or increasing trend increase their credit score upon viewing. This finding suggests that encouraging individuals to access information when they have declining credit scores, and thus are more likely to avoid information, may worsen their financial health

Keywords: Business.
Advisor: Hartmann Wesley R. (Wesley Robert)
Benkard C. Lanier 
Lattin James M.