Variable Temptations and Black Mark Reputations

Abstract

In a world of imperfect information, reputations often guide the sequential decisions to trust and to reward trust. We consider two-player situations, where the players meet but once. One player – the truster – decides whether to trust, and the other player – the temptee – has a temptation to betray when trusted. The strength of the temptation to betray may vary from encounter to encounter, and is independently distributed over time and across temptees. We refer to a recorded betrayal as a black mark. We study how trusters and temptees interact in equilibrium when past influences current play only through its effect on certain summary statistics. We first focus on the case that players only condition on the number of black marks of a temptee and study the different equilibria that emerge, depending on whether the trusters, the temptees, or a social planner has the ability to specify the equilibrium. We then show that conditioning on the number of interactions as well as on the number of black marks does not prolong trust beyond black marks alone. Finally, we consider more general summary statistics of a temptee’s past and identify conditions under which there exist equilibria where trust is possibly suspended only temporarily.