The Role of Reciprocity in the Creation of Reputation

Abstract

AbstractAlthough reputation has been shown to solve problems of information and opportunism in business relationships, knowledge of the emergence of reputation in business relationships beyond the internet is considerably scarcer. In this article, we argue that in social and economic systems, a norm of reciprocity is an important driver for the transfer of reputation information. A social norm to return favours given by others enhances the flow of information about potential exchange partners. We distinguish between direct and generalized reciprocity and argue that both may foster the flow of information about exchange partners in economic systems. Moreover, we examine the interdependency between competition and reciprocity. Our empirical evidence is based on a laboratory experiment with students and a factorial survey experiment with 209 managers from a German business cluster. Our results show that direct reciprocity, in particular, is an important driver of the transmission of reputation information to third parties. Moreover, in an exchange system, transmission costs and competition reduce the willingness to produce reputation information.