The Dark Side of Reputation

Abstract

Reputation is the foundation of theories of private ordering. These theories contend that commercial actors will act honestly because if they do not, they will get a bad reputation and others will not want to do business with them in the future. But economists and scholars of networks increasingly realize that reputation has its defects. Mixed in with trustworthy and useful reputation information on which commerce of all sorts relies is inaccurate, distorted, misguided, or outright fraudulent information. Much of the existing literature about reputation’s flaws focuses on unintentional distortions caused by biases, the requirements of social niceties, and the dearth of fully representative information. This Article, by contrast, approaches the problem of the distortion of reputation from the dark side. It uses a rich set of sixteenth- and seventeenth-century English court cases and merchant correspondence to examine how the deliberate manipulation of reputation, and, importantly, people’s failure to verify the gossip and rumors creating such reputation, enabled fraud. It turns out that reputation was “a complex process,” even in interconnected early modern markets in which merchants did business face-to-face and participated in active gossip networks. Even being caught, tried, and found guilty of a serious fraud did not necessarily undermine one’s business and perceived trustworthiness in these networks, which raises questions about how much the merchants depended upon reputation when making decisions about whom to trust.

Keywords: Reputation, fraud, bankruptcy, England, legal history, private ordering, commercial law, law & economics