The social cost of cheap pseudonyms

We consider the problems of societal norms for cooperation and reputation w hen it is possible to obtain cheap pseudonyms, something that is becoming q uite common in a wide variety of interactions on the Internet. This introdu ces opportunities to misbehave without paying reputational consequences. A large degree of cooperation can still emerge, through a convention in which newcomers "pay their dues" buy accepting poor treatment from players who h ave established positive reputations. One might hope for an open society wh ere newcomers are treated well, but there is an inherent social cost in mak ing the spread of reputations optional. We prove that no equilibrium can su stain significantly more cooperation than the dues-paying equilibrium in a repeated random matching game with a large number of players in which playe rs have finite lives and the ability to change their identities, and there is a small but nonvanishing probability of mistakes. Although one could rem ove the inefficiency of mistreating newcomers by disallowing anonymity, thi s is not practical or desirable in a wide variety of transactions. We discu ss the use of entry fees, which permits newcomers to be trusted but exclude s some players with low payoffs, thus introducing a different inefficiency. We also discuss the use of free but unreplaceable pseudonyms, and describe a mechanism that implements them using standard encryption techniques, whi ch could be practically implemented in electronic transactions.