Reputation-based governance

!!! Introduction: Reputation in governance

Most readers are familiar with examples of Internet–based reputation systems. On eBay, buyers and sellers may rate one another at the end of a transaction.

On many online communities, such as Slashdot, readers may assess each other’s comments. Around the world, many restaurants’ guides and hotel booking services allow past clients to rate their experience.

In all these cases, past feedbacks posted on the Internet allow to compute a “reputation index” that provides strong incentives to behave in a socially advantageous fashion.

On eBay, persons most times refrain from cheating also because they fear to receive retribution in the form of negative “feedbacks”. On Slashdot, readers may decide to filter out writers who typically receive poor ratings.

Persons who care for their writings to be read then have an incentive to craft them carefully. The clients of hotels and of restaurants clients increasingly use reputation information that they access through the Internet as a base for their decisions on where to stay or dine.

Hotel keepers and restaurant managers typically take notice.

The importance of reputation is hardly a novelty.

Reputational considerations have always played an important role in human affairs, and contribute to the predictability of behaviours, a prerequisite for most social intercourses.

In many contexts, they provide an alternative to the contractualization of behaviors and even to the presence of a well–working judicial system.

In this respect, the Internet innovates in three important ways, by allowing what Dellarocas (2003) defines the word–of–mouth.”

First, it allows to spread voice–of–mouth to an unprecedented level.

This, in turn, permits the existence of reputation–based interactions — be them of the market type, or other — at a global level and among persons many degrees of separation apart.

Secondly, the presence of a digital information infrastructure allows for a careful engineering of many details that contribute to the overall outcome of the system, such as: The condition under which the assessments are made, the metric according to which they aggregate to form a reputation index, the rules for participating and the possibility of changing one’s identity, etc.

Third, the Internet democratizes reputation systems, because it allows for their design so that all relevant parties may play the game under similar conditions.

In conventional contexts information on reputation mostly spreads informally and via social networks: people who are better placed within them are at an advantage because they obtain better information.

This, in turn, creates an incentive to spend time and resources to place oneself within such advantaged networks, a socially wasteful activity that economists would define as “rent seeking”.

What is reputation–based governance?

In principle, reputation–based governance applies both to private and to public activities; however, I’ll here discuss public governance and, more to the point, the management of policies. Reputation–based governance is a way of executing (and as we will see, possibly, of choosing) policies that hinges on the reputation of the actors involved, by a systematic use of an appropriate digital information system that computes reputation measures and makes them accessible to all.

Policies can be either projects, i.e., initiatives having a goal well specified in advance and lasting a definite amount of time (such as, the building of a new bridge), or programs, i.e., services that are delivered over a period of time (for example, an educational degree offered at a public university). Note however that paying attention to public policies does not imply that private actors are outside our visual range, because governments increasingly collaborate with non–governmental actors and with firms to pursue their goals.

We’ll consider a public procurement example below, where a public administration explicitly asks private actors to provide goods or services.

Reputation affects incentives.

The underlying behavioural assumption is rooted in what social scientists call “rational choice theory”. In a nutshell, I posit that social actors act to advance their self–interest.

Firms maximize profits, and having a good reputation helps them in this respect. Within public administrations, I adopt the so called “economics of career concerns approach” (see Holmström, 1982; Dewatripont, et al., 1999), according to which bureaucrats are motivated by their desire to step up the career ladder, in a situation where a good past performance advances one’s chances of obtaining a promotion.

Note that such view on human behaviour does not rule out the presence of non–monetary incentives, including some of those that have been advanced in advocates’ accounts of open source software production — such as “egoboo”, or the personal satisfaction that derives from public recognition of one’s (voluntary) work (see Raymond, 2000). Personal satisfaction also is a positive function of reputation, at least for all who are not snobbish to the point of enjoying not being appreciated by the masses, so incentives of this type would actually reinforce the role of reputation.

Reputational effects have three main positive effects on governance.

First, at a given moment in time they help discriminating between providers of different quality — at least when a choice is possible.

If the task is choosing a restaurant, knowing about their reputation allows to pick a good one.

Secondly, they allow selection forces to weed out the least fit.

Bad restaurants eventually go out of business, and mediocre bureaucrats, when they do not get fired, at least do not obtain promotions so that they progressively become less relevant.

Thirdly, they provide incentives to invest in quality. The owner of a restaurant, or the bureaucrat, operating in a context where performance matters, has a strong reason to try to improve his skills.

These effect, in varying measures, are present wherever reputational considerations play at least some role in governance. Within reputation–based governance, the link between past performances and reputation is particularly strong, following the presence of two of the three motives mentioned above: The unprecedented publicity of reputational information afforded by the Internet, and the possibility of designing the reputation system and metric according to needs.

!!! An application: The management of public works

To help fix ideas I discuss the application of reputation–based governance to the management of public works.