Reputation Failure: The Limits of Market Discipline in Consumer Markets

Many believe that consumersourced reputational information about products would increasingly replace topdown regulation Instead of protecting consumers through coercive laws reputational information gleaned from the wisdom of the crowd would guide consumer decision making There is now a growing pressure to deregulate in diverse fields such as contracts products liability consumer protection and occupational licensingbrbrThis Article presents a common failure mode of systems of reputation Reputation Failure By spotlighting the publicgood nature of reviews rankings and even gossip this Article shows the mismatch between the private incentives consumers have to create reputational information and its social value As a result of this divergence reputational information is beset by participation selection and social desirability biases that systematically distort it The Article argues that these distortions are inherent to most systems of reputation and that they make reputation far less reliable than traditionally understoodbrbrThe limits of reputation highlight the centrality of the law to the future of the marketplace Proper legal institutions can deal not only with the symptoms of reputation failure ” consumer mistakes ” but improve the flow and quality of reputational information thus correcting reputation failures before they arise The Article offers a general framework and explores a number of strategies A more robust system of reputation can preserve consumer autonomy without sacrificing consumer welfar