Limited records and reputation bubbles

Abstract

This paper offers a tractable and fully rational model to study the economics of reputation in a dynamic market with limited record-keeping, i.e., a market in which new entrants observe only the last few periods of play of the long-run player instead of the full history of the market. We show that trust is gradually granted to the opportunistic long-run player despite the fact that his type is perfectly observed by the short-run opponents, and the perfectly informed short-run players ride and drive up “reputation bubbles” at the expense of their uninformed successors. We characterize equilibrium payoffs uniformly over time, which is useful for analyzing ongoing repeated relationships where the starting moments have passed.