Reputation Failure: Market Discipline and Its Limits
65 Pages Posted: 10 Sep 2018 Last revised: 14 Dec 2018
Date Written: August 28, 2018
Reputation failure is a systematic problem with the reliability of consumer-based reputational information. When choosing to rate, review, gossip, or otherwise share information about their experiences with goods and services, individuals are mostly guided by private—rather than public-serving—reasons. Consequently, as the Article demonstrates, the resulting body of reputational information is beset by participation, selection, and social desirability biases, making reputation filtered, biased, and distorted.
The growth of the sharing-economy, alongside classic work in political economy, sociology, and law & economics, has instilled a false sense that reputational information can solve coordination and trust problems in markets without legal intervention. As a result, there is growing pressure to deregulate markets and recede protections in diverse fields such as contracts, products liability, and occupational licensing. By documenting the existence of reputation failure, the Article articulates a new justification for state action in these areas. More generally, the Article argues that fixing reputation failures should be a high-priority program for lawmakers in the 21st century and a central mission of consumer protection and related agencies.
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: Suggested Citation