Inducing good behavior via reputation

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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 suitable 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, attain the social optimum in any Nash equilibrium. These findings are robust to requiring short-lived agents to choose any one of their actions with an arbitrarily small but positive probability. On the other hand, we show that when both parties are long-lived and sufficiently patient, the limiting robust equilibrium cannot be close to perpetual good behavior. The contrast we attain demonstrates the significance of the interaction's longevity and exhibits a novel application of the theory of learning and experimentation in repeated games.