Reputation Effects under Interdependent Values
An Economics and Finance External Seminar.
I study reputation effects when individuals have persistent private information that matters for their opponents' payoffs. I examine a repeated game between a patient informed player and a sequence of myopic uninformed players. The informed player privately observes a persistent state, and is either a strategic type who can flexibly choose his actions or is one of the several commitment types that mechanically plays the same action in every period. Unlike the canonical models on reputation effects, the uninformed players' payoffs depend on the state. This interdependence of values introduces new challenges to reputation building, namely, the informed player could face a trade-off between establishing a reputation for commitment and signaling favorable information about the state. My results address the predictions on the informed player's payoff and behavior that apply across all Nash equilibria. When the stage game payoffs satisfy a monotone-supermodularity condition, I show that the informed long-run player can overcome the lack-of-commitment problem and secure a high payoff in every state and in every equilibrium. Under a condition on the distribution over states, he will play the same action in every period and maintain his reputation for commitment in every equilibrium. If the payoff structure is unrestricted and the probability of commitment types is small, then the informed player's return to reputation building can be low and can provide a strict incentive to abandon his reputation.
Academic Homepage: https://economics.mit.edu/grad/harrydp