Information Acquisition and Reputation Dynamics

Qingmin Liu ()
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Qingmin Liu: Graduate School of Business, Stanford Univeristy

No 06-030, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: We study reputation games where a long-lived player with a possible commitment faces a sequence of short-lived players who must pay to observe the long-lived player's past behavior. In this costly information model we show that equilibrium behavior is cyclical. The long-lived player builds her reputation up only to exploit it; then builds it up again, and so on. We call this behavior reputation renewal and show that for a wide class of reputation games as well as for a host of possible alternatives to the information cost structure, all equilibria display reputation renewal. We provide a method to construct the equilibria, and explicitly construct an essentially unique equilibrium for the case of linear cost functions. We also find that in the reputation renewal equilibria, the short-lived players always randomize how much information they purchase, but play pure strategies once the information is obtained.

Keywords: behavioral economics; reputation (search for similar items in EconPapers)
JEL-codes: D03 (search for similar items in EconPapers)
Date: 2006-01
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