Business-to-business information sharing and the foundations of reputational motives for contract compliance
Focus of the study
How do firms develop reputations among potential business partners, and what are the costs or benefits of information sharing in the business-to-business context?
Models of reputation and collective enforcement are predicated on a relatively unexamined premise: that agents will share information about infractions. When does it make sense for a business that has gained private information about a supplier or customer to share that information, and with whom?
While a small empirical literature has examined how choice architecture affects consumer reviews in e-commerce, the business-to-business context involves strategic considerations that are unlikely to arise with individual consumers. In this project, we conduct the third round of a panel survey of traders in Lagos, Nigeria to better understand incentives to share information.
We expect that strategic considerations determine the extent and content of information sharing. We intend for this survey to serve as a baseline survey for a later project to help build and evaluate a business-to-business review platform to be used by these traders.
Broader motivation for the research
It is commonly assumed that reputational forces help sustain business agreements in contexts where formal enforcement is weak or costly to access. While there is a small empirical literature demonstrating this within bilateral repeated relationships, there is little evidence that public reputations play a similar role. If the punishment for contract breach is limited to the loss of one business relationship rather than many, the scope for cooperation will be smaller and more costly.
In their classic paper on the role of the law merchant in medieval Europe, Milgrom et al. (1990) discuss how an institution can support public reputation when any two parties transact infrequently, but focus primarily on the costliness of communicating information and incentives to participate in collective punishment. There is an additional challenge to the development of public reputations, whether organized by a central institution or not: when will businesses that are potentially in competition with one another want to share information about the behavior of transaction partners, even if information transmission is costless?
This question is key for understanding in what contexts public reputations are likely to arise and therefore to what extent this force can substitute for formal contract enforcement. It is also important for understanding the role that institutions – formal or informal – may play in helping sustain information sharing and reputational motives for good behavior. Credit bureaus are an example of an institution that arose in some contexts through the efforts of private firms, but the modern form requires substantial formal coordination, and banks may not wish to participate depending on the tradeoff between incentive effects on borrowers and the increase in competition between banks (Padilla and Pagano, 1997). There is also evidence that businesses respond to strategic considerations regarding information sharing on other subjects (Hardy and McCasland 2017, Cai and Szeidl 2016).
- Shelby Grossman, University of Memphis
- Morgan Hardy, New York University Abu Dhabi
- Meredith Startz, Stanford University