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Information Acquisition and Reputation Dynamics

  • Qingmin Liu


    (Graduate School of Business, Stanford Univeristy)

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    We study reputation games where a long-lived player with a possible commitment faces a sequence of short-lived players who must pay to observe the long-lived player's past behavior. In this costly information model we show that equilibrium behavior is cyclical. The long-lived player builds her reputation up only to exploit it; then builds it up again, and so on. We call this behavior reputation renewal and show that for a wide class of reputation games as well as for a host of possible alternatives to the information cost structure, all equilibria display reputation renewal. We provide a method to construct the equilibria, and explicitly construct an essentially unique equilibrium for the case of linear cost functions. We also find that in the reputation renewal equilibria, the short-lived players always randomize how much information they purchase, but play pure strategies once the information is obtained.

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    Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 06-030.

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    Date of creation: Jan 2006
    Date of revision:
    Handle: RePEc:sip:dpaper:06-030
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    1. George J. Mailath & Larry Samuelson, 2000. "Who Wants a Good Reputation?," CARESS Working Papres sell-rep, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
    2. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796.
    3. Paul Milgrom & John Roberts, 1980. "Predation, Reputation, and Entry Deterrence," Discussion Papers 427, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Martin W. Cripps & George J. Mailath & Larry Samuelson, 2004. "Imperfect Monitoring and Impermanent Reputations," Econometrica, Econometric Society, vol. 72(2), pages 407-432, 03.
    5. 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.
    6. Michihiro Kandori & Ichiro Obara, 2004. "Endogeous Monitoring," 2004 Meeting Papers 752, Society for Economic Dynamics.
    7. D. Fudenberg & David K. Levine, 1989. "Reputation and Equilibrium Selection in Games with a Patient Player," Levine's Working Paper Archive 508, David K. Levine.
    8. Carl Shapiro, 1982. "Consumer Information, Product Quality, and Seller Reputation," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 20-35, Spring.
    9. V. V. Chari & Patrick J Kehoe, 1998. "Sustainable Plans," Levine's Working Paper Archive 600, David K. Levine.
    10. Douglas W. Diamond, 1998. "Reputation Acquisition in Debt Markets," Levine's Working Paper Archive 602, David K. Levine.
    11. Mailath, George J & Samuelson, Larry, 2001. "Who Wants a Good Reputation? Erratum," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 714, July.
    12. Margaret J. Miller (ed.), 2003. "Credit Reporting Systems and the International Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134225, June.
    13. Mehmet Ekmekci, 2010. "Sustainable Reputations with Rating Systems," Discussion Papers 1505, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    14. Stokey, Nancy L, 1989. "Reputation and Time Consistency," American Economic Review, American Economic Association, vol. 79(2), pages 134-39, May.
    15. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
    16. Christopher Phelan, 2001. "Public trust and government betrayal," Staff Report 283, Federal Reserve Bank of Minneapolis.
    17. Chari, V V & Kehoe, Patrick J, 1993. "Sustainable Plans and Mutual Default," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 175-95, January.
    18. Rosenthal, R W, 1979. "Sequences of Games with Varying Opponents," Econometrica, Econometric Society, vol. 47(6), pages 1353-66, November.
    19. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
    20. Taylor, John B., 1983. "`Rules, discretion and reputation in a model of monetary policy' by Robert J. Barro and David B. Gordon," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 123-125.
    21. Harold L. Cole & Narayana R. Kocherlakota, 2001. "Finite memory and imperfect monitoring," Staff Report 287, Federal Reserve Bank of Minneapolis.
    22. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
    23. Harold L. Cole & James Dow & William B. English, 1994. "Default, settlement, and signalling: lending resumption in a reputational model of sovereign debt," Staff Report 180, Federal Reserve Bank of Minneapolis.
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