Yonathan Arbel, ‘Reputation Failure: Market Discipline and Its Limits’

Abstract 
Free-market advocates seek to repeal broad swaths of tort, contract, and consumer law, trusting reputation to provide effective market-discipline. Their core belief is that reputation assures honest dealings because a seller reputed to sell inferior goods will lose business. Realizing that, the rational seller will behave honestly in order to maximize profits, thus obviating the need for costly, coercive, and uncertain legal interventions.

Despite their focus on rationality, these common accounts have glossed over a profound puzzle. Reputational information is a public good par-excellence, comprising myriad disparate decisions to gossip, share word-of-mouth, write online reviews, and rate products. Why, then, is it rational to produce reputational information? Who does it? To what effect?

This Article’s primary contribution is the introduction of the concept of a reputation failure, the systematic distortion of reputational information that jeopardizes the ability of reputation to discipline markets. Like the more familiar concept of market failure, reputation failure offers a new justification for legal interventions in markets. Moreover, fixing reputation failure offers a new program of regulation, one that would appeal to many free-market advocates.

Arbel, Yonathan A, Reputation Failure: Market Discipline and Its Limits (August 28, 2018). U of Alabama Legal Studies Research Paper No 3239995.

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