Horizontal Reputation

Abstract: We consider reputation-building by a decision maker (e.g., politician) with horizontal reputational concerns, i.e., whose payoff is highest when he reaches a bliss reputation corresponding to some intermediate positioning (e.g., when perceived as congruent with the median voter). Reputational concerns give rise to multiple equilibria characterized by repositioning towards the bliss reputation. In one equilibrium, this repositioning is moderate, which benefits the market, but it is extreme in the other: the attempt to cater to the market's preferences involves overreacting (e.g., picking too extreme policies). This overreaction sometimes lowers welfare as compared to the no-reputation case. In the presence of multiple audiences, the inefficiency of the extreme equilibrium is exacerbated by the endogenous selection of inefficiently narrow and congruent audiences.