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Your Reputation Is Who You're Not, Not Who You'd Like To Be

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  • George J. Mailath
  • Larry Samuelson

Abstract

We construct a model in which a firm's reputation must be built gradually, is managed, and dissipates gradually unless appropriately maintained. Consumers purchase an experience good from a firm whose unobserved effort affects the probability distribution of consumer utilities. Consumers observe private, noisy signals (consumer utilities) of the behavior of the firm, yielding a game of imperfect private monitoring} The standard approach to reputations introduces some "good" or "Stackelberg" firms into the model, with consumers ignorant of the type of the firm they face and with ordinary firms acquiring their reputations by masquerading as Stackelberg firms. In contrast, the key ingredient of our reputation model is the continual possibility that the ordinary or "competent" firm might be replaced by a "bad" or "inept" firm who never chooses the Stackelberg action. Competent firms then acquire their reputations by convincing consumers that they are not inept. Building a reputation is an exercise in separating oneself from inept firms who one is not, rather than pooling with Stackelberg firms who one would like to be. We investigate how a firm manages such a reputation, showing, among other features, that a competent firm may not always choose the most efficient effort level to distinguish itself from an inept one.

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File URL: http://www.ssc.upenn.edu/~gmailath/wpapers/rep-is-sep.pdf
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Bibliographic Info

Paper provided by University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences in its series CARESS Working Papres with number rep-is-sep.

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Date of creation: 07 Aug 1998
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Handle: RePEc:wop:pennca:rep-is-sep

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  1. George J. Mailath & Stephen Morris, . "Repeated Games with Imperfect Private Monitoring: Notes on a Coordination Perspective," Penn CARESS Working Papers 5d82f80bcea2483b6387c5b68, Penn Economics Department.
  2. Damme, E.E.C. van & Bhaskar, V., 1997. "Moral hazard and private monitoring," Discussion Paper 1997-98, Tilburg University, Center for Economic Research.
  3. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August.
  4. Mailath, George J & Samuelson, Larry, 2001. "Who Wants a Good Reputation?," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 415-41, April.
  5. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August.
  6. Paul Milgrom & John Roberts, 1997. "Predation, reputation , and entry deterrence," Levine's Working Paper Archive 1460, David K. Levine.
  7. Compte, Olivier, 2002. "On Failing to Cooperate When Monitoring Is Private," Journal of Economic Theory, Elsevier, vol. 102(1), pages 151-188, January.
  8. Al-Najjar, Nabil Ibraheem, 1995. "Decomposition and Characterization of Risk with a Continuum of Random Variables," Econometrica, Econometric Society, vol. 63(5), pages 1195-1224, September.
  9. Fudenberg, Drew & Levine, David I & Maskin, Eric, 1994. "The Folk Theorem with Imperfect Public Information," Econometrica, Econometric Society, vol. 62(5), pages 997-1039, September.
  10. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  11. Douglas Gale & Robert W. Rosenthal, 1992. "Price and Quality Cycles for Experience Goods," Papers 0035, Boston University - Industry Studies Programme.
  12. Drew Fudenberg & David Kreps & Eric Maskin, 1988. "Repeated Games with Long-Run and Short-Run Players," Working papers 474, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Levine, David K. & Martinelli, Cesar, 1998. "Reputation with Noisy Precommitment," Journal of Economic Theory, Elsevier, vol. 78(1), pages 55-75, January.
  14. repec:wop:humbsf:1996-65 is not listed on IDEAS
  15. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  16. Wolfgang HÄRDLE & J. MARRON & L. YANG, 1996. "Discussion," SFB 373 Discussion Papers 1996,65, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  17. Sekiguchi, Tadashi, 1997. "Efficiency in Repeated Prisoner's Dilemma with Private Monitoring," Journal of Economic Theory, Elsevier, vol. 76(2), pages 345-361, October.
  18. Watson, Joel, 1999. "Starting Small and Renegotiation," Journal of Economic Theory, Elsevier, vol. 85(1), pages 52-90, March.
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