When individuals trade with strangers, there is a temptation to renege on con- tracts. In the absence of repeated interaction or exogenous enforcement mechanisms, this problem can impede valuable exchange. Historically, individuals have solved this problem by forming institutions that sustain trade using group, rather than individ- ual, reputation. Groups can employ two mechanisms to uphold reputation that are generally unavailable to isolated individuals: information sharing and in-group pun- ishment. In this paper, we design a laboratory experiment to distinguish the roles of these two mechanisms in sustaining group reputation and increasing gains from trade. We nd that information sharing encourages path dependence via group reputation; good (bad) behavior by individuals results in greater (fewer) gains from exchange for the group in the future. However, the mere threat of in-group punishment is enough to discourage bad behavior, even if punishment is rarely employed. When combined, information sharing and in-group punishment work as complements; the presence of in- group punishment encourages cooperation early on, and information sharing reinforces this behavior over time.
Kimbrough, E.O. and Rubin, J. (2013). Sustaining group reputation. ESI Working Paper 13-14. Retrieved from http://digitalcommons.chapman.edu/esi_working_papers/44