Reputational Contract Enforcement and Mutual Recriminations

33 Pages Posted: 26 Jun 2007

Date Written: January 2006

Abstract

This paper examines the workings of reputational contract enforcement when the community can only observe that a partnership has ended, not the reason why. Agents match in partnerships to engage in a transaction with two-sided moral hazard. After one transaction, they can choose to stay with the same partner or to seek out a new partner. If one agent ends a partnership after being cheated, the fact that outsiders cannot distinguish between cheated and cheater means both suffer the same reputational damage. This makes agents reluctant to end relationships following a bad outcome, reducing incentives within the relationship. As a result, higher levels of cooperation and efficiency may be sustained if information about past relationships is limited than if it is widespread.

Keywords: reputation, community enforcement

JEL Classification: C73, D23, D82

Suggested Citation

Lorentzen, Peter L., Reputational Contract Enforcement and Mutual Recriminations (January 2006). Available at SSRN: https://ssrn.com/abstract=995328 or http://dx.doi.org/10.2139/ssrn.995328

Peter L. Lorentzen (Contact Author)

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117-1080
United States

HOME PAGE: http://www.peterlorentzen.com

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