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Your reputation is who you're not, not who you'd like to be

  • Mailath,G.J.
  • Samuelson,L.

    (University of Wisconsin-Madison, Social Systems Research Institute)

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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Paper provided by Wisconsin Madison - Social Systems in its series Working papers with number 18.

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Date of creation: 1998
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Handle: RePEc:att:wimass:199818
Contact details of provider: Postal: UNIVERSITY OF WISCONSIN MADISON, SOCIAL SYSTEMS RESEARCH INSTITUTE(S.S.R.I.), MADISON WISCONSIN 53706 U.S.A.

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  1. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 2058, David K. Levine.
  2. Mailath, G.J. & Morris, S., 1998. "Repeated Games With Imperfect Private Monitoring: Notes on a Coordination Perspective," Papers 349, Australian National University - Department of Economics.
  3. Levine, David K. & Martinelli, Cesar, 1998. "Reputation with Noisy Precommitment," Journal of Economic Theory, Elsevier, vol. 78(1), pages 55-75, January.
  4. Mailath,G.J. & Samuelson,L., 1998. "Who wants a good reputation?," Working papers 19, Wisconsin Madison - Social Systems.
  5. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  6. Douglas Gale & Robert W. Rosenthal, 1992. "Price and Quality Cycles for Experience Goods," Papers 0035, Boston University - Industry Studies Programme.
  7. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August.
  8. V. Bhaskar & Eric van Damme, 1998. "Moral Hazard and Private Monitoring," Game Theory and Information 9809004, EconWPA.
  9. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August.
  10. Fudenberg, Drew & Kreps, David M & Maskin, Eric S, 1990. "Repeated Games with Long-run and Short-run Players," Review of Economic Studies, Wiley Blackwell, vol. 57(4), pages 555-73, October.
  11. David Kreps & Paul Milgrom & John Roberts & Bob Wilson, 2010. "Rational Cooperation in the Finitely Repeated Prisoners' Dilemma," Levine's Working Paper Archive 239, David K. Levine.
  12. 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.
  13. Sekiguchi, Tadashi, 1997. "Efficiency in Repeated Prisoner's Dilemma with Private Monitoring," Journal of Economic Theory, Elsevier, vol. 76(2), pages 345-361, October.
  14. 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.
  15. Compte, Olivier, 2002. "On Failing to Cooperate When Monitoring Is Private," Journal of Economic Theory, Elsevier, vol. 102(1), pages 151-188, January.
  16. Watson, Joel, 1999. "Starting Small and Renegotiation," Journal of Economic Theory, Elsevier, vol. 85(1), pages 52-90, March.
  17. 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.
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