Misconduct and Reputation under Imperfect Information

Abstract

Misconduct – market actions that are unethical and indicative of fraud or wrongdoing – is a significant yet poorly understood issue that underlies many economic and financial transactions. Does misconduct in markets matter? When and how does reputation act as a discipline against seller misconduct? We design a field experiment to study the impact of two-sided anti-misconduct information programs on markets, which we deploy on the local markets for mobile money (Human ATMs) in Ghana. We show that, at baseline, these markets are characterized by substantial imperfect information, consumer mistrust, and vendor misconduct. The information programs lead to a large reduction in misconduct (-21 pp = -72%) and as a result, an increase in overall market activity, firm sales revenue, and consumer welfare. We develop a simple sanctioning and moral hazard framework between vendors and consumers that shows the treatment effect is due to a combination of more accurate consumer’ beliefs about misconduct and increased reputation concerns for vendors. Together, our results indicate a potentially significant source of local financial market frictions, where market activities are underprovided due to misconduct and difficulty in building reputation. Social sanctions through reputational impacts can promote formal local markets when formal sanctions are weak.

Keywords: forensics and information, vertical markets and reputation, household finance

JEL Classification: D18, D83, L14, Z13, D14, O12