Asymmetry of Reputation Loss and Recovery under Endogenous Partnerships: Theory and Evidence

Abstract

This paper is inspired by real-world phenomena that firms lose customers based on imprecise information and take a long time to recover. If consumers are playing an ordinary repeated game with fixed partners, there is no clear reason why recovery slowly happens. However, if consumers are playing an endogenously repeated game, a class of simple efficient equilibria exhibits the asymmetry of fast loss of customers after a bad signal and slow recovery. Exit is systematic but formation of a new partnership is random. We also give empirical evidence of our equilibria at an individual-firm level.

Keywords: dynamic asymmetry, imperfect monitoring, trust game, endogenous relationships

JEL Classification: C73, D82