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Bad Reputation under Bounded and Fading Memory

Author

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  • Benjamin Sperisen

    () (Department of Economics, Tulane University)

Abstract

I relax the full memory assumption in Ely and Valimaki's (2003) mechanic game, where reputation is bad for all players. First I consider "bounded memory," where only finitely many recent periods are observed. For long memory, reputation is still bad. Shortening memory avoids bad reputation but only by making it "useless." There is no "happy middle:" reputation is either useless or reduces equilibrium payoffs for any memory length. I find a qualitatively different result for "fading memory," where players randomly sample past periods with probabilities "fading" toward zero. Unlike bounded memory, reputation is not bad but remains useful under sufficiently fast fading. This result extends to a more general class of both good and bad reputation games, suggesting reputation leaves long-run player behavior unaffected in some realistic word-of-mouth environments.

Suggested Citation

  • Benjamin Sperisen, 2015. "Bad Reputation under Bounded and Fading Memory," Working Papers 1527, Tulane University, Department of Economics.
  • Handle: RePEc:tul:wpaper:1527
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    File URL: http://repec.tulane.edu/RePEc/pdf/tul1527.pdf
    File Function: First Version, December 2015
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    References listed on IDEAS

    as
    1. Liu, Qingmin & Skrzypacz, Andrzej, 2014. "Limited records and reputation bubbles," Journal of Economic Theory, Elsevier, vol. 151(C), pages 2-29.
    2. Mailath, George J. & Olszewski, Wojciech, 2011. "Folk theorems with bounded recall under (almost) perfect monitoring," Games and Economic Behavior, Elsevier, vol. 71(1), pages 174-192, January.
    3. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
    4. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796.
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    Cited by:

    1. Benjamin Sperisen, 2016. "Bounded Memory, Reputation, and Impatience," Working Papers 1602, Tulane University, Department of Economics.

    More about this item

    Keywords

    reputation; bounded memory; fading memory; mechanic game;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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