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A Theory of Reputation



This paper puts forward a unified theory of reputation (both with oneself, or self-esteem, and with others, or status) bringing together insights from conventional microeconomics and theories of identity, moral behavior, and symbolic values. We propose that reputation has both instrumental and intrinsic value to individuals, in that it can provide access to increased economic opportunity as well as self-esteem and status. Reputation can also be negative: stigma diminishes economic opportunities, self-esteem and status. Reputation is acquired by belonging to social groups (family, firms, social networks, but also regions and nations), access to social groups is costly, and agents make constrained choices on which groups to join on the basis of their relative preferences for reputation and consumption. Utility thus derives not from consumption, but from acquiring the maximum of a desired combination of reputation with oneself, reputation with others, and consumption. The theory is illustrated by means of a simple model of maximization of a Lancasterian utility function, of which a base case and three special versions are presented. The first special version contains identical individuals with different initial endowments choosing groups to belong to depending on the access costs and reputation and consumption rewards from membership. In the second version individuals are heterogeneous with respect to the importance they attach to reputation with self and others and consumption in their utility function. In the final version preference are endogenous: agents’ preferences respond to those of the groups they belong to, so they become more materialistic or more reputation-oriented depending on whether they are surrounded by materialistic or reputation- oriented agents. The demand and supply of social groups are endogenously determined and as utility comes from three different sources (provided to an individual by belonging to a package of groups) there is a continuum of solutions for the market equilibrium even assuming all individuals are identical in preferences. We present some examples with simulations of different equilibria associated with particular historical phenomena, discussing threshold values of key parameters.