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Fragility of reputation and clustering of risk-taking

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  • Guillermo L. Ordoñez

Abstract

Concerns about constructing and maintaining good reputations are known to reduce borrowers' excessive risk-taking. However, I find that the self-discipline induced by these concerns is fragile, and can break down without obvious changes in economic fundamentals. Furthermore, in the aggregate, breakdowns are clustered among borrowers with intermediate and good reputations, which can exacerbate an economy's weakness and contribute to a broad economic crisis. These results come from an aggregate dynamic global game analysis of reputation formation in credit markets. The selection of a unique equilibrium is accomplished by assuming that borrowers have incomplete information about economic fundamentals.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 431.

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Date of creation: 2009
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Handle: RePEc:fip:fedmsr:431

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Keywords: Risk;

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References

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  1. Koopman, Siem Jan & Kräussl, Roman & Lucas, André, 2006. "Credit cycles and macro fundamentals," CFS Working Paper Series 2006/33, Center for Financial Studies (CFS).
  2. Tykvová, Tereza, 2005. "Who Chooses Whom? Syndication, Skills and Reputation," ZEW Discussion Papers 05-74, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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  9. Guillermo Ordonez, 2008. "Essays on Learning and Macroeconomics," Levine's Working Paper Archive 122247000000002250, David K. Levine.
  10. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
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  14. Guillermo Ordonez & Andrew Atkeson, 2009. "Optimal Regulation in the Presence of Reputation Concerns," 2009 Meeting Papers 830, Society for Economic Dynamics.
  15. Steiner, Jakub, 2008. "Coordination cycles," Games and Economic Behavior, Elsevier, vol. 63(1), pages 308-327, May.
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  18. Sylvain Chassang, 2010. "Fear of Miscoordination and the Robustness of Cooperation in Dynamic Global Games With Exit," Econometrica, Econometric Society, vol. 78(3), pages 973-1006, 05.
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  20. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796, September.
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  23. Radhakrishnan Gopalan & Vikram Nanda & Vijay Yerramilli, 2011. "Does Poor Performance Damage the Reputation of Financial Intermediaries? Evidence from the Loan Syndication Market," Journal of Finance, American Finance Association, vol. 66(6), pages 2083-2120, December.
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Cited by:
  1. Bernardita Vial & Felipe Zurita, 2013. "Reputation-Driven Industry Dynamics," Documentos de Trabajo 436, Instituto de Economia. Pontificia Universidad Católica de Chile..
  2. Guillermo Ordonez, 2013. "Sustainable Shadow Banking," NBER Working Papers 19022, National Bureau of Economic Research, Inc.
  3. Gary B. Gorton & Guillermo Ordonez, 2012. "Collateral Crises," NBER Working Papers 17771, National Bureau of Economic Research, Inc.
  4. Guillermo L. Ordonez, 2010. "Confidence Banking," 2010 Meeting Papers 310, Society for Economic Dynamics.

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