Fragility of reputation and clustering of risk-taking

Guillermo Ordonez

No 431, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Concerns about constructing and maintaining good reputations are known to reduce borrowers' excessive risk-taking. However, I find that the self-discipline induced by these concerns is fragile, and can break down without obvious changes in economic fundamentals. Furthermore, in the aggregate, breakdowns are clustered among borrowers with intermediate and good reputations, which can exacerbate an economy's weakness and contribute to a broad economic crisis. These results come from an aggregate dynamic global game analysis of reputation formation in credit markets. The selection of a unique equilibrium is accomplished by assuming that borrowers have incomplete information about economic fundamentals.

Keywords: Risk (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cbe
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Fragility of reputation and clustering of risk-taking (2013)
Working Paper: Fragility of Reputation and Clustering in Risk Taking (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:431

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