Reputation for a Servant of Two Masters

32 Pages Posted: 26 May 2012

See all articles by Heski Bar-Isaac

Heski Bar-Isaac

University of Toronto - Rotman School of Management

Joyee Deb

Leonard N. Stern School of Business - Department of Economics

Date Written: May 2012

Abstract

Classic models of reputation consider an agent taking costly actions to affect a single, homogeneous audience’s beliefs about his ability, preferences or other characteristic. However, in many economic settings, agents must maintain a reputation with multiple parties with diverse interests. In this paper we study reputation incentives for an agent who faces two audiences with opposed preferences. We ask if the existence of multiple audiences per se changes reputation incentives. Further, should the agent deal with the different audiences commonly or separately? Our analysis yields some new qualitative insights. Specifically, the presences of heterogeneous audiences is more likely to lead the agent towards “pooling” equilibria in which he takes an intermediate compromise action. Instead, dealing with only one audience leads the agent to cater towards that audience’s preferences, giving rise to a “separating” outcome or pooling on some extreme action. We analyze the welfare implications, and show that the agent most prefers that both audiences commonly observe all the actions that he takes. In our setting, reputation acts as an informal contract that enforces desirable behavior through future continuation payoffs. Our analysis highlights that the presence of multiple heterogeneous audiences can, naturally, lead these rewards to be non-monotonic in an agent’s reputation. We show different ways that this non-monotonicity arises. In an infinite horizon setting, it can emerge through endogenous interactions between the audiences, through equilibrium expectations of the agent’s choice of action. It can also arise, perhaps more trivially, through direct payoff interactions.

Suggested Citation

Bar-Isaac, Heski and Deb, Joyee, Reputation for a Servant of Two Masters (May 2012). NYU Working Paper No. 2451/31550, Available at SSRN: https://ssrn.com/abstract=2066961

Heski Bar-Isaac (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416 978 3626 (Phone)

HOME PAGE: http://https://sites.google.com/site/heskibarisaac/home

Joyee Deb

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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