Reputation system: contexts, issues and solutions
When I was reading this question what first came to my mind was an episode I had just seen of a comedy TV series called ‘’The Office’’, which depicts the everydaylives of office employees in the Scranton, Pennsylvania, branch of the fictional Dunder Mifflin Paper Company; so in this episode the Dunder Mifflin Paper Company was setting a new policy to every branch of the company about modernization and the use of technology, for example, the creation of a website and its usage for making deals with clients. So what happens is that the co-manager of theScranton branch is against the incorporation of these new technologies and strongly opposed to sell and making deals through the Internet with its clients, he believed that there was nothing better than personal treatment to close deals. So he tries to prove his point by visiting old clients of the branch with the purpose of gaining them back with the ‘’good old fashioned way’’, personal contact.Surprisingly for him, his old clients said that they were not interested in making any deals with his branch because since they did not have a website it was more expensive to seal the deals personally than via the Internet. Even though this was on a TV show, it actually happens in reality, so it is important to consider not only the role of reputation and personal treatment in the pre-market tradebut how this type of social relationships can affect modern economy and in what contexts are they useful, considering the vast presence of anonymous markets in present economics.
First it is necessary under what certain conditions and contexts does reputation actually matters. It is very difficult to create an economic organization based on reputation and trustiness in a context where there isnot any background information of either the consumer or the capitalist and that the number of clients is so big that it becomes an anonymous market. No one really knows who they are dealing with, it is a mere transaction. Therefore usually reputation does not have any role in anonymous markets. Examples can be seen throughout the history. For example, Judaism which is one of the oldest religionsof humankind. Jewish’s social, economic and political organization were built on reputation. The perfect example are the Maghrebis, a Jewish merchant community established in the north of Africa. Basically, the Maghrebis were the best merchants in the Mediterranean zone because they did not let people from other cultures to work with them; they all knew each other so it was a traditional orfamiliar system. Reputation and trustiness were the pillars of their economic subsistence and effectiveness. With the pass of time better ships were invented and the market grew, but the Maghrebis’ system remained the same so they could not spread out too much. In the other hand the Genoese merchants hired mercenaries to guard their merchandise, so they could expand as much as they could pay formercenaries and boats. The final result was that the Genoese merchants prospered and the Maghrebis succumbed to technological development.
Another example can be seen in the recent economic crisis. Essentially what happened was that some institutions sold mortgages to people that could not pay, so if the homeowner was to default, investors did not care because as soon as they sold the mortgage to thenext investor it was his problem. Subsequently when the homeowner actually defaults, the bankers’ income turns into houses (lack of liquidity), so they put the houses on sale but this happens to every banker, so there is an excess on supply of houses and houses’ prices fall. So with the lack of liquidity the whole financial system froze. Summing it all up, the crisis pretty much occurred...