The fragility of reputation effects

TL;DR

This paper demonstrates that even minimal skepticism among short-lived players about commitment can nullify reputation effects, aligning long-term player payoffs with complete-information benchmarks.

Contribution

It introduces uncertainty about signal structures in reputation models, showing how small misperceptions can eliminate reputation benefits.

Findings

Small skepticism can fully negate reputation effects.

Long-term payoffs are bounded by complete-information benchmarks.

Reputation effects are fragile under signal uncertainty.

Abstract

I revisit the canonical reputation framework in which a long-lived player interacts with a sequence of short-lived opponents and may be either strategic or a commitment type who always plays the same, possibly mixed, action. I depart by allowing short-lived players to be uncertain not only about the long-lived player's type, but also about the signal structure. I show that even vanishingly small misspecified skepticism of short-lived players about commitment as an explanation of the observed signals can completely eliminate reputation effects: a patient strategic long-lived player's equilibrium payoff is bounded above by the canonical complete-information benchmark.