Reputation Effects with Endogenous Records

TL;DR

This paper analyzes how firms' reputation strategies and record erasure behaviors impact long-term outcomes, showing that opportunistic firms can undermine reputation benefits even with disclosure policies.

Contribution

It introduces a model of reputation with endogenous record erasure, demonstrating how opportunistic behavior affects equilibrium payoffs and reputation building.

Findings

Reputation building incentivizes high quality until continuation value exceeds commitment payoff.

Small fractions of opportunistic types can eliminate reputation benefits.

Disclosure policies do not increase opportunistic firms' payoffs beyond equilibrium levels.

Abstract

A patient firm interacts with a sequence of consumers. The firm is either an honest type who supplies high quality and never erases its records, or an opportunistic type who chooses what quality to supply and may erase its records at a low cost. We show that in every equilibrium, the firm has an incentive to build a reputation for supplying high quality until its continuation value exceeds its commitment payoff, but its ex ante payoff must be close to its minmax value when it has a sufficiently long lifespan. Therefore, even a small fraction of opportunistic types can wipe out the firm's returns from building reputations. Even if the honest type can commit to reveal information about its history according to any disclosure policy, the opportunistic type's payoff cannot exceed its equilibrium payoff when the consumers receive no information.