Events

Prof. Volker Nocke
Professor of Economics
University of Mannheim

We study how internal monitoring and imperfect public signals together shape the value and sustainability of a collective reputation in organizations that operate across multiple markets. The organization comprises a global player—such as a franchisor—whose actions affect all markets, and market-specific local players—such as franchisees—whose behavior affects other markets only via reputational spillovers. In a repeated game with both imperfect public monitoring (noisy public signals of effort) and partial information (perfect monitoring of local effort by the global player known to the local player), we characterize the conditions under which it is beneficial for the global player to acquire and utilize internal monitoring technology. When internal monitoring is feasible, the global player can employ a contagion strategy, triggering organization-wide disciplinary actions in response to detected shirking by any local player. This mechanism fully eliminates local players’ incentives to free-ride on the collective reputation. However, sustaining such a strategy requires placing the global player under countervailing incentives to ensure the credibility of the contagion strategy, imposing additional costs on the organization. We show how the trade-off between these positive and negative effects determines whether internal monitoring, alongside imperfect public signals, enhances the durability of collective reputation.