Reputation Failure: Market Discipline and Its Limits

72 Pages Posted: 10 Sep 2018 Last revised: 1 Nov 2018

See all articles by Yonathan A. Arbel

Yonathan A. Arbel

University of Alabama - School of Law

Date Written: August 28, 2018

Abstract

Free-market advocates seek to repeal broad swaths of tort, contract, and consumer law, trusting reputation to provide effective market-discipline. Their core belief is that reputation assures honest dealings because a seller reputed to sell inferior goods will lose business. Realizing that, the rational seller will behave honestly in order to maximize profits, thus obviating the need for costly, coercive, and uncertain legal interventions.

Despite their focus on rationality, these common accounts have glossed over a profound puzzle. Reputational information is a public good par-excellence, comprising myriad disparate decisions to gossip, share word-of-mouth, write online reviews, and rate products. Why, then, is it rational to produce reputational information? Who does it? To what effect?

This Article’s primary contribution is the introduction of the concept of a reputation failure, the systematic distortion of reputational information that jeopardizes the ability of reputation to discipline markets. Like the more familiar concept of market failure, reputation failure offers a new justification for legal interventions in markets. Moreover, fixing reputation failure offers a new program of regulation, one that would appeal to many free-market advocates.

Keywords: Market Discipline, Reputation, Contracts, Torts, Consumer Protection, Game Theory, Monte Carlo, Law and Economics

JEL Classification: L14, K12, K13, D11, D40, D62, D83, D64, K20

Suggested Citation

Arbel, Yonathan A., Reputation Failure: Market Discipline and Its Limits (August 28, 2018). U of Alabama Legal Studies Research Paper No. 3239995. Available at SSRN: https://ssrn.com/abstract=3239995 or http://dx.doi.org/10.2139/ssrn.3239995

Yonathan A. Arbel (Contact Author)

University of Alabama - School of Law ( email )

P.O. Box 870382
Tuscaloosa, AL 35487
United States

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