Information value and externalities in reputation building

In sequential equilibrium theory, reputation building is independent of whether the reputation builder is matched with one long-run partner or a series of short-run “strangers”. We observe, however, that reputation builders are significantly more challenged by long-run players in both laboratory chain store and buyer-seller games. Reputation builder behavior is more predictable than implied by equilibrium, and so reputation information has more economic value than implied by equilibrium. For short-run players, this reputation information value is an externality. For long-run players, the value of the information is internalized and so they have greater incentive to challenge the reputation builder.