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The Reputation Trap
Author(s) -
Levine David K.
Publication year - 2021
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta17891
Subject(s) - reputation , trap (plumbing) , shadow (psychology) , simple (philosophy) , microeconomics , event (particle physics) , business , economics , computer security , computer science , law , psychology , engineering , political science , physics , philosophy , epistemology , quantum mechanics , environmental engineering , psychotherapist
Few want to do business with a partner who has a bad reputation. Consequently, once a bad reputation is established, it can be difficult to get rid of. This leads on the one hand to the intuitive idea that a good reputation is easy to lose and hard to gain. On the other hand, it can lead to a strong form of history dependence in which a single beneficial or adverse event can cast a shadow over a very long period of time. It gives rise to a reputational trap where an agent rationally chooses not to invest in a good reputation because the chances others will find out is too low. Nevertheless, the same agent with a good reputation will make every effort to maintain it. Here, a simple reputational model is constructed and the conditions for there to be a unique equilibrium that constitutes a reputation trap are characterized.