Tradable Reputation

Abstract

We examine a reputation market in an infinite repeated game setting, where agents operate firms and trade firms' reputations. Agents exert effort to produce homogeneous products, which ex post may be of different qualities. High-type agents have a lower cost of effort than low types. An auditor performs random checks on products and determines agents' reputations. Our analysis depicts a full equilibrium in the reputation system with audit, including separating, partial separating, and pooling equilibrium under different conditions. In particular, we show that in separation, agents' types can be sorted by their reputations, which is in contrast to Tadelis (2002).

JEL Classification: D40, D86, M20, M42