Eric Friedmanand Paul Resnick
Friedman, E. and P. Resnick (2001). "The Social Cost of Cheap Pseudonyms." Journal of Economics and Management Strategy 10(2): 173-199.
earlier version was presented at the Telecommunications Policy Research Conference,
Washington, DC, October 1998.
Version of 8/11/99 available here-- not the final printed version (PDF format)
On the Internet it is easy for someone to obtain a new identity. This
introduces opportunities to misbehave without paying reputational
consequences. A large degree of cooperation can still emerge, through
a convention in which newcomers ``pay their dues'' by accepting
poor treatment from players who have established positive
reputations. One might hope for an open society where newcomers are
treated well, but there is an inherent social cost in making the
spread of reputations optional. We prove that no equilibrium can
sustain significantly more cooperation than the dues-paying
equilibrium in a repeated random matching game in which players have
finite lives and the ability to change their identities, and there is
a small but nonvanishing probability of mistakes and a large number of
Although one could remove this inefficiency by disallowing anonymity,
this is not practical or desirable in a wide variety of
transactions. We discuss the use of entry fees, which permit newcomers
to be trusted but exclude some players with low payoffs, thus
introducing a different inefficiency. We also discuss the use of
unchangeable pseudonyms, and describe a mechanism which implements
them using standard encryption techniques.