A Theory of Collective Reputations (with Applications to the Persistence of Corruption and to Firm Quality)

Abstract

The paper is a first attempt at modelling the idea of group reputation as an aggregate of individual reputations. A member's current incentives are affected by his past behaviour and, because his track record is observed only with noise, by the group's past behaviour as well. The paper thus studies the joint dynamics of individual and collective reputations and derives the existence of stereotypes from history dependence rather than from a multiplicity of equilibria or from the existence of a common trait as is usually done in the literature. It shows that new members of an organization may suffer from an original sin of their elders long after the latter are gone, and it derives necessary and sufficient conditions under which group reputations can be rebuilt. Last, the paper applies the theory to analyse when a large firm can maintain a reputation for quality. 1. COLLECTIVE REPUTATIONS Collective reputations play an important role in economics and the social sciences. Countries, ethnic, racial or religious groups are known to be hard-working, honest, corrupt, hospitable or belligerent. Some firms enjoy substantial rents from their reputations for producing high-quality products. Some departments are reported to treat their faculty or students fairly. The paper is a first attempt at modelling the idea of group reputation as an aggregate of individual reputations. A member's current incentives are affected by her past behaviour and, because her track record is observed only with noise, by the group's past behaviour as well. The paper studies the joint dynamics of individual and collective reputations in a model in which current generations are progressively replaced by new ones, and derives the existence of stereotypes from history dependence rather than from a multiplicity of equilibria or from the existence of a common trait as is usually done in the literature (see Section 2 for a detailed comparison with the literature). It shows that new members of an organization may suffer from an original sin of their elders long after the latter are gone, and it derives necessary and sufficient conditions under which group reputations can be rebuilt. Last, the paper applies the theory to analyse when a large firm can maintain a reputation for quality. Let us spell out the building blocks of our theory in more detail: (a) A group's reputation is only as good as that of its members. Each member is characterized by individual traits such as talent, diligence or honesty. Past individual behaviour conveys information about these traits and generates individual reputations.