The Fragmentation of Reputation

This paper investigates the use of reputation in an economy where principals hire agents for two different kinds of tasks, in which the agents have differing aptitudes. Principal-agent matches are remade every period, but a principal can acquire some information on the past behavior of her current agent. This allows consideration of two different reputation mechanisms—one in which an agent’s past record of defections makes no reference to the kind of task, and another in which information about past defections is available separately for each task. The two kinds of reputation can be interpreted as “personal honor” and performance record (e.g. credit history) respectively. I first characterise the equilibria under the two mechanisms. I then assume that the economy is in equilibrium under one mechanism when the other becomes available. I find that it may be incentive-compatible for individual agents to use the new mechanism, thus dislodging the existing equilibrium, even when the change ultimately turns out to be efficiencyreducing. JEL Classifications: ———————————– ∗ I thank the participants at the NEUDC conference 2000, the Econometric Society summer meetings 2001, The Australian Economic Theory Workshop, and seminar participants at the Universities of NSW, Sydney and Melbourne, Hong Kong University, Simon Fraser University, Indian Statistical Institute Delhi, and the Delhi School of Economics. I also thank Catherine de Fontenay and Hodaka Morita for extensive comments and discussion on an earlier draft. The hospitality of the Economic Theory Centre at the University of Melbourne in September 2002 is warmly acknowledged.