Sustaining Group Reputation

kimbrough, erik o. ; rubin, jared;

When individuals trade with strangers, there is a temptation to renege on agreements. If repeated interaction or exogenous enforcement is unavailable, societies often solve this problem via institutions that rely on group, rather than
individual, reputation. Groups can employ two mechanisms to uphold reputation
that are unavailable to individuals: information sharing and in-group punishment.
We design a laboratory experiment to distinguish the roles of these mechanisms
when individual reputations are unobservable. Subjects are split into
groups and play a trust game with random re-matching, where only the group
identity of one�s partner is known. Treatments differ by whether information about
group members� transactions is shared and whether in-group punishment is
possible. We find that information sharing encourages path dependence via
group reputation: good (bad) behavior results in greater (fewer) gains from exchange in the future. However, the mere threat of in-group punishment is enough
to discourage bad behavior