Inducing good behavior via reputation

This paper asks whether or not it is possible to induce agents to good behavior permanently via regulators' reputations and attain perpetual social efficiency. We propose and analyze a repeated incomplete information game with a specific payoff and monitoring structure between a regulator possessing a behavioral type and an agent. We provide an affirmative answer when a patient regulator faces myopic agents: Reputation empowers the regulator to prevent agents' bad behavior in the long-run with no cost and hence to attain the social optimum in any Nash equilibrium. However, with long-lived and patient players, reputation cannot induce permanent good behavior in equilibrium involving sporadic experimentation with bad behavior. The stark contrast between these cases portrays the significance of the longevity of the interaction and provides a novel application of the theory of learning and experimentation in repeated games.