DP14408 (Bad) Reputation in Relational Contracting

Author(s): Rahul Deb, Matthew Mitchell, Mallesh Pai
Publication Date: February 2020
Keyword(s): bad reputation, experts, relational contracting
JEL(s): C73, D82, D86
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14408

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.