The Value of Reputation

Reputation can be seen as a piece of public knowledge that summarizes the previous behavior of an individual or institution towards others. Reputation plays an important role in fostering human cooperation. Knowing the other’s reputation is particularly helpful when interactions with otherwise unknown individuals are frequent. One’s own good reputation can be something very valuable, as illustrated for example by the finding that eBay sellers in good reputation tend to have more and/or more profitable transactions. This concept of the value of reputation, together with the spread of more formalized reputation systems on the internet, raises a number of intriguing questions. Are individuals aware of the value of their reputation? Should one be held liable for destroying someone else’s reputation without good reason to do so? How could the value of reputation be quantified? In order to address these questions, we perform experiments on economic games and reputation systems in the laboratory. In particular, we allow the participants in our experiments to buy and sell their reputation in a market. The emerging prices indicate how participants assess the value of reputation. We investigate to what extend the trading of reputation may harm reputation systems, and also examine situations where the trading of reputation can actually be beneficial in that it promotes cooperation and thereby increases social welfare.