(Bad) Reputation in Relational Contracting

53 Pages Posted: 3 Mar 2020

See all articles by Rahul Deb

Rahul Deb

University of Toronto

Matthew F. Mitchell

Rotman School of Management

Mallesh Pai

Rice University

Date Written: February 2020

Abstract

Motivated by markets for "expertise," we study a bandit model where a principal chooses between a safe and risky arm. A strategic agent controls the risky arm and privately knows whether its type is high or low. Irrespective of type, the agent wants to maximize duration of experimentation with the risky arm. However, only the high type arm can generate value for the principal. Our main insight is that reputational incentives can be exceedingly strong unless both players coordinate on maximally inefficient strategies on path. We discuss implications for online content markets, term limits for politicians and experts in organizations.

Keywords: bad reputation, experts, relational contracting

JEL Classification: C73, D82, D86

Suggested Citation

Deb, Rahul and Mitchell, Matthew F. and Pai, Mallesh, (Bad) Reputation in Relational Contracting (February 2020). CEPR Discussion Paper No. DP14408, Available at SSRN: https://ssrn.com/abstract=3547340

Rahul Deb (Contact Author)

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://www.economics.utoronto.ca/debrahul/

Matthew F. Mitchell

Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada

Mallesh Pai

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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