Events

Author:

• Gautam BOSE
  University of New South Wales

This paper presents a model of institutional change in the mechanism used to transmit individual reputations to potential transacting partners. We posit a dynamic principal-agent economy in which matches are made each period, and a principal can acquire some information on the past behavior of her current agent. Agents may be assigned to one of two different tasks. Two different reputation mechanisms are considered — in one, an agent's record of cooperations or defections is maintained without reference to the kind of task, while task-specific records are maintained in the other. The equilibrium are characterized and the welfare properties compared. We find that neither mechanism uniformly dominates the other. We then characterize the conditions in which equilibrium under one mechanism would be disrupted by the availability of the other, in the sense that it would be optimal for individuals to use the new mechanism. This can occur even when the change ultimately turns out to be efficiency-reducing.