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The Reputation Trap

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  • David K Levine

Abstract

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.
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Suggested Citation

  • David K Levine, 2021. "The Reputation Trap," Levine's Working Paper Archive 786969000000001516, David K. Levine.
    • Handle: RePEc:cla:levarc:786969000000001516
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    File URL: http://www.dklevine.com/archive/refs4786969000000001516.pdf
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    References listed on IDEAS

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    2. Slotnick, Susan A. & Sobel, Matthew J., 2022. "Collaboration with a supplier to induce fair labor practices," European Journal of Operational Research, Elsevier, vol. 302(1), pages 244-258.

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