Take Action

Home | Faculty & Research Overview | Research

Research Details

Reputations, Investigations and Self Regulation


Consider a principal who hires an agent, e.g., a broker is hired to fill stock orders. The outcome may be good or bad, e.g., the orders may be filled at favorable or unfavorable prices. A bad outcome may simply reflect bad luck or it may result from the agent defrauding the principal. How is the agents incentive to defraud the principal restrained? With a dynamic costly-state-verification model we examine two possibilities: (i) reputational penalties, meaning that principals can choose not to transact with an agent who has a bad history even if there is no evidence of fraud; and (ii) investigations, meaning that at a cost, an agents performance can be directly checked for fraud. Reputational penalties have no direct cost but they are imprecise in the sense that an agent can be penalized even if it was just bad luck. Investigations are costly but precise in the sense that an agent is penalized only if he is found to have committed fraud. We examine how principals would balance the two ways of controlling an agents incentives. Then we examine the incentives of agents to form a self-regulatory organization to conduct its own investigations of agent performance and to penalize agents who are caught cheating. The threat of SRO investigations can enhance agents welfare but reduce the welfare of principals. In effect, SRO investigations can inefficiently from the principals perspective crowd out reputational penalties.


Working Paper


Peter DeMarzo, Michael J. Fishman, Kathleen Hagerty

Date Published



DeMarzo, Peter, Michael J. Fishman, and Kathleen Hagerty. 2007. Reputations, Investigations and Self Regulation.


Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more


Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.


Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more