The Fragmentation of Reputation

Abstract

This paper investigates the use of reputation in an economy where principals hire agents for two different kinds of tasks, in which the agents have differing aptitudes. Principal-agent matches are remade every period, but a principal can acquire some information on the past behavior of her current agent. I consider two different reputation mechanisms—one in which an agent's past record of defections makes no reference to the kind of task (Integrated Reputation), and another in which information about past defections is available separately for each task (Fragmented Reputation). The two kinds of reputation can be interpreted as "personal honor" and performance record (e.g. credit history) respectively.I first characterize the equilibria under the two mechanisms and make some welfare comparisons, showing that IR strictly welfare dominates FR over a significant range of parameter values. I then show that, when both mechanisms are available, integrated reputation will not be used in equilibrium by principals. Thus if the economy is in equilibrium using only the IR mechanism, and the FR mechanism becomes subsequently available, then IR will become obsolete. In the appropriate ranges of parameter values, this change reduces welfare.