Repetition, Ritual and Reputation: How Do Market Participants Deal with (Some Types of) Incomplete Information?
17 Pages Posted: 11 Jun 2020
Date Written: February 15, 2020
Incomplete information is an obstacle to deal-making. Information problems also exist as to ongoing matters in the parties’ relationship. That this is so is well known. But attention has focused largely on a subset of information problems where there is agreement on what the information is and who has (or will have, or can reliably get) it. (Is the car a good car? The seller, and a mechanic, know the answer.) I will call this type of information “harder” information, contrasting it with “softer” information as to which there is far less agreement. (Does the seller run a ‘tight ship’? Does it have a good reputation?) Seemingly uncontroversially, the task of information acquisition involves doing so until the additional costs are not warranted by the additional benefits and relatedly, attempting to economize on those costs. But this characterization yields a far more straightforward way to proceed as to the acquisition of harder information than it does as to softer information.
The process by which softer information is sought and acquired relies on different mechanisms, notably repetition, ritual and reputation. These mechanisms that are anointed as appropriate by the broader transactional community; their purpose, in not-insignificant part, is to provide the decision-makers with a justification in case of a bad outcome. This is significant for its own sake, but also provides a more nuanced (and surprisingly underappreciated) way to understand how parties pursue their self-interest. That the “hammer” of incentive alignment is so salient has, in my view, led to information problems too often being regarded as “nails.” A richer view of the problems contracting parties face in converging on a valuation and other deal terms can yield a useful addition to the toolbox, as well as insights into how people arrive at their beliefs about what is credible and what is true. One such insight is the extent to which acquisition of information is importantly more of a social process than is generally appreciated.
Keywords: incomplete information, justification under uncertainty, incentive alignment, reputation
JEL Classification: D81, D82, D86, K12, K22
Suggested Citation: Suggested Citation