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(Bad) Reputation in Relational Contracting

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  • Pai, Mallesh
  • Deb, Rahul
  • Mitchell, Matthew

Abstract

Motivated by markets for "expertise," we study a bandit model where a principal chooses between a safe and risky arm. A strategic agent controls the risky arm and privately knows whether its type is high or low. Irrespective of type, the agent wants to maximize duration of experimentation with the risky arm. However, only the high type arm can generate value for the principal. Our main insight is that reputational incentives can be exceedingly strong unless both players coordinate on maximally inefficient strategies on path. We discuss implications for online content markets, term limits for politicians and experts in organizations.

Suggested Citation

  • Pai, Mallesh & Deb, Rahul & Mitchell, Matthew, 2020. "(Bad) Reputation in Relational Contracting," CEPR Discussion Papers 14408, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14408
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    References listed on IDEAS

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    12. Philippe Aghion & Matthew O. Jackson, 2016. "Inducing Leaders to Take Risky Decisions: Dismissal, Tenure, and Term Limits," American Economic Journal: Microeconomics, American Economic Association, vol. 8(3), pages 1-38, August.
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    Cited by:

    1. Harry Pei, 2020. "Reputation Building under Observational Learning," Papers 2006.08068, arXiv.org, revised Nov 2020.

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    More about this item

    Keywords

    Relational contracting; Bad reputation; Experts;
    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
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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