Codes of Conduct and Bad Reputation

Abstract

This paper studies bad reputation games in environments with agents that can infer an opponent's intentions. A long-run player faces a sequence of short-run players that imperfectly observe the long-run player's actions, and his type is private information. Short-run players participate in the game whenever certain actions are expected to be played. These actions, however, might be interpreted as perverse behavior, whereby pursuing a separation from the bad types leads to efficiency losses in any equilibrium without observing intentions. When players infer intentions perfectly, I first show that inefficiencies and reputation concerns due to a bad reputation disappear. Moreover, I find that stochastic renewal of the long-run player and imperfect observation of intentions together overcome inefficiencies caused by bad reputation.