Reputation Formation with Decisiveness

Sanmitra Ghosh and Mridu Prabal Goswami

January 15, 2016

Jadavpur University, Kolkata, India

Indian Statistical Institute, Kolkata, India.

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 1 Introduction
Experimental studies have found, when an individual is given the power to distribute re-
sources amongst a set of individuals including him/her self in the set, then the decider does
not keep all the resources to own self. This result contradicts the Nash equilibrium predic-
tions for the underlying games in which the set of strategies consist of various splits. Our
objective in this paper is to provide one possible explanation why the decider may not keep
everything to its own self even if the predictions of Nash equilibrium dictates so.
We now describe the model.

2 Model
Let there be a set of two individuals I = {1, 2}. Suppose an object of monetary value 1 has
been assigned to individual 1 to be distributed amongst 1 and 2. The game is the following.
Individual 1 keeps x to its own self and offers 1x to individual 2. However the first round of
offers are only promise. Irrespective of whether the promises are accepted or rejected by 2 in
the next round 1 offers the real split. That is the real split is the one which 1 offers to 2 after
hearing the response of 2 to the promise made in the first part. The promise made is not
binding. The Nash equilibrium outcomes of this game is well known. We show if 1 considers
the reaction shown by 2 to be 2s belief about 1s generosity and 1 takes this generosity
into account then 1 will not offer the final split that Nash equilibrium predicts. We then
define a game that takes into account the these beliefs and show that Nash equilibria of such
games differ from the conventional Nash predictions. A special case is when 1 does not take
into account the signal offered by 2. In this case the Nash equilibrium is same as the Nash
equilibrium of the stated game.
The main contribution of the model in this paper lies in allowing the decider to form
a belief about its reputation that the responder may have about him. Then the decider
takes into account such reputation to construct a counter-factual game, that is a game that
would have been played had such a reputation was true and common knowledge. Then we
demonstrate that the Nash equilibrium of such a game involves giving away more money
then what it would be otherwise.
Following questions seem important.

What is the mathematical form of signal that is received by 1?

How the signals are taken into account by 2 according to 1?

How, how the signals are taken into account by 2 according to 1? is used by 1 to
form type about ones own self.

How such types are translated into utility from monetary pay-offs?.

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 Then showing that Nash equilibrium of the perceived/counter-factual game is different
from the stated game.

3 Possible Formalization
Let the set of promises be denoted by P = {(xp , 1 xp )|0 xp 1}. Let the actual offers be
denoted by A = {(xa , 1 xa )|0 xa 1}. Acceptance and rejection of promises be denoted
by Ap , Rp . Let also the acceptance and rejection of actual offers are denoted by Aa , Ra . A
typical strategy of 1 is denoted by ((making a promise),(making actual offers if promises are
accepted) and (making actual offers if promises are rejected)). A typical strategy of player
2 is from the set {accept a promise, reject a promise} {accept an offer, reject an offer}.