Information Acquisition and Reputation Dynamics

Abstract

We study dynamic incentives and behaviour in markets with costly discovery of past transactions. In our model, a sequence of short-lived customers interact over time with a single long-lived firm that privately knows its type (good or opportunistic). Customers must pay to observe the firm's past behaviour. We characterize the equilibrium structure that features accumulation, consumption, and restoration of reputation. The opportunistic firm deliberately builds its reputation up to a point where the maximum periods of information acquired by customers do not reveal past opportunistic behaviour and exploits the customers who most trust the firm.