Endogenous Group Reputation. A Formal Model
DOI:
https://doi.org/10.3989/ris.2007.i46.10Keywords:
Game Theory, Trust, Social NormsAbstract
When investment in individual reputation cannot solve contract incompleteness, group reputation becomes crucial to achieve social cooperation. In this article we develop a formal model in which the link between social pressure, group reputation formation and between groups trust is studied. Specifically, we model a transaction which involves trust as an asymmetric game. Additionally, we consider the operation of community-enforced sanctions within the group whose trustworthiness is required. We show that for a proportion high enough of honourable agents willing to sanction non-honourable peers, the optimal strategy of a selfish rational agent is to honour trust when placed in him and, therefore, the perfect Bayesian equilibrium is one in which inter-group trust emerges. The required proportion of sanctioning agents depends negatively on the efficacy of the sanctioning technology and positively on the size of the opportunistic incentives faced by the agents whose trustworthiness is required. Even if the deterrence effect of social pressure is not strong enough, trust can emerge if the potential benefits from cooperation compensate the eventual harm associated with abused trust.
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