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Community Enforcement of Trust with Bounded Memory

Author

Listed:
  • V Bhaskar
  • Caroline Thomas

Abstract

We examine how trust is sustained in large societies with random matching, when records of past transgressions are retained for a finite length of time. To incentivize trustworthiness, defaulters should be punished by temporary exclusion. However, it is profitable to trust defaulters who are on the verge of rehabilitation. With perfect bounded information, defaulter exclusion unravels and trust cannot be sustained, in any purifiable equilibrium. A coarse information structure, that pools recent defaulters with those nearing rehabilitation, endogenously generates adverse selection, sustaining punishments. Equilibria where defaulters are trusted with positive probability improve efficiency, by raising the proportion of likely re-offenders in the pool of defaulters.

Suggested Citation

  • V Bhaskar & Caroline Thomas, 2019. "Community Enforcement of Trust with Bounded Memory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(3), pages 1010-1032.
    • Handle: RePEc:oup:restud:v:86:y:2019:i:3:p:1010-1032.
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    File URL: http://hdl.handle.net/10.1093/restud/rdy048
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    Citations

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    Cited by:

    1. Sergei Kovbasyuk & Giancarlo Spagnolo, 2016. "Memory and Markets," EIEF Working Papers Series 1606, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2017.
    2. S. Nageeb Ali & David A. Miller, 2020. "Communication and Cooperation in Markets," Papers 2005.09839, arXiv.org.
    3. Christa N. Gibbs & Benedict Guttman-Kenney & Donghoon Lee & Scott Nelson & Wilbert Van der Klaauw & Jialan Wang, 2024. "Consumer Credit Reporting Data," Staff Reports 1114, Federal Reserve Bank of New York.
    4. Sun, Yiman, 2024. "A dynamic model of censorship," Theoretical Economics, Econometric Society, vol. 19(1), January.
    5. Kaya, Ayça & Roy, Santanu, 2022. "Market screening with limited records," Games and Economic Behavior, Elsevier, vol. 132(C), pages 106-132.
    6. Daniel Monte & Roberto Pinheiro, 2017. "Costly Information Intermediation as a Natural Monopoly," Working Papers (Old Series) 1721, Federal Reserve Bank of Cleveland.
    7. Harry Pei, 2022. "Reputation Effects under Short Memories," Papers 2207.02744, arXiv.org, revised Jan 2023.

    More about this item

    Keywords

    Trust game; Repeated games with community enforcement; Imperfect monitoring; Bounded memory; Credit markets; Information design;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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