Group reputations: An experimental foray

Abstract

Often information structures are such that while individual reputation building is impossible groups of agents would have the opportunity of building up a reputation. We experimentally examine whether groups of sellers in markets that suffer from moral hazard are able to build up reputations and, thus, avoid market breakdown. We contrast our findings with situations where sellers alternatively can build up an individual reputation or where there are no possibilities for reputation building at all. Our results offer a comparatively optimistic outlook on group reputations as long as groups are small. Even though sellers only receive some of the reputation benefits of withstanding short-run incentives to exploit trust, they are able to overcome the dilemma and successfully exploit the information structure. However, the ability to build successful group reputations depends on group size with trust breaking down in larger groups.