Abstract

In their classic analyses, Hobbes and Hume argue that offensively violating a covenant is irrational because the offense ruins one’s reputation. This paper explores conditions under which reputation alone can enforce covenants. The members of a community are modeled as interacting in a Covenant Game repeated over time. Folk theorems are presented that give conditions under which the Humean strategy of performing in covenants only with those who have never offensively violated or performed with an offensive violator characterizes an equilibrium of the repeated Covenant Game. These folk theorems establish that for certain ideal settings Hobbes’ and Hume’s arguments against offensively violating covenants are compelling. However, these ideal settings presuppose that the community has certain mechanisms that generate common knowledge of the identities of those with whom one should perform. I analyze the results of computer simulations of the interactions in a community whose members must rely upon private communication alone. The computer simulation data show that in this community, reputation effects cannot effectively deter members from offensively violating covenants. I conclude that Hobbes’ and Hume’s warnings against offensive violation are compelling only on condition that the community is sufficiently structured to generate common knowledge among its members. I also conclude that even in such structured communities, the Humean strategy is not the uniquely “correct” policy.