Repetition and Reputation: Implications for Trust and Trustworthiness in the Short and in the Long Run

Abstract

Repeat transactions are not necessarily the rule in today's global economy. Indirect reputation systems, where buyers base their decisions on a seller's previous interactions with other buyers, are a potential substitute for personal interactions - provided such information is available. This paper examines experimentally to what degree indirect reputation building substitutes for direct reputation building in repeat interactions in the short run and analyzes the effects these environments have on behavior in the long run. We find that repeat interactions are the most effective institutional arrangement to foster trust and trustworthiness in the short and in the long run.