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Category_ID - 20
Doc_Title - Community Enforcement with Endogenous Information
Doc_Author - Priyodorshi Banerjee
Doc_Number - 0
Doc_Start_Date - 11/21/2002
Doc_End_Date - 11/21/2002
Doc_URL_AddLocal - C:\WINNT\ACF1D2.tmp
Tag_Functional - Publication
Tag_SubUnit - Development Economics
Tag_Program - NULL
Tag_Industry - NULL
Tag_Misc - NULL
Tag_Resources - NULL
Tag_Practice - Development,Microeconomics

Many pairwise trading enviroments are vulnerable to risks of opportunistic exploitation of one trader by another (payment default, poor quality of supply etc.). Non-verifiability of these hold-ups by outsiders and the absence of public enforcement impair the efficiency of such environments. Sustenance of cooperative arrangements may then require mechanisms like social reputation based on reports made by traders. This paper explores the credibility and cost of reporting structures that define the nature of social reputation mechanisms. Assuming costless information flows, it is shown that cooperation can be sustained as a sequential equilibrium if agents are required to make simultaneous public reports. The result continues to hold with small costs of information transmission. The above result may not be robust to the presence of information processing costs, if the information collection process is unobservable. However, cooperation can be restored through the creation of endogenous equilibrium uncertainty.