Private ordering theorists put a great deal of weight on reputation to enforce honest behavior among market participants. They assume that the fear of getting a bad reputation and consequently being shut out of opportunities to trade, particularly within a network of repeat players, incentivizes potential cheaters to act honestly.

While this model has proven enduring and important, it lacks nuance. Opportunistically inclined people can, and will, simply falsify reputation signals and thereby get the best of both worlds: a good reputation and the gains from their opportunism. In a recent article, The Dark Side of Reputation, I study this limitation on the governing power of reputation. The paper discusses examples of reputation-manipulating fraud by early seventeenth-century London merchants. Such men offer ideal test cases because they did business in conditions in which private ordering theory would predict reputation would play a powerful disciplinary role: tight-knit networks of repeat players who shared strong social and commercial ties, who did their business in a confined geographic area, and who gossiped freely and often about each other. And yet the fraudsters succeeded in convincing prospective business partners that they were men of good credit, when, in fact, they were not.

One significant problem with reputation from the perspective of enabling fraud is that it is not objective. It does not refer to a discoverable Truth. Instead, it is founded on the individual interpretation of signals and indicia, many of which can be falsified. The manipulation of reputation is consequently simple: make yourself look better than you are, and people will often believe what they perceive.

Seventeenth-century fraudsters, as those today, took advantage of the fact that potential business partners wanted to trust and do deals more than they wanted to invest in verifying the fraudsters’ reputational signals. The article looks at this process within the context of the common fraud known as a bust-out, the basic elements of which have not changed in three hundred years. In a bust-out, a business first establishes good credit, carefully paying on time and in full. Once the buyer has a good reputation, he buys a large amount of wares on credit, which he passes off to a secret partner. When his creditors come calling and refuse to extend more credit, the buyer disappears.

One of the historical cases involved a young merchant, Thomas Moxon, who bought cloth from regional clothiers on credit, secretly gave it to his partner, John Skynner, for export, and ultimately fled overseas when the debts became too pressing. The clothiers had not commenced trading with Moxon without doing any due diligence at all. They did make inquiries about him with one London factor who knew Moxon. But what they did not do was question or investigate any of the other indicia of reputation on which they depended: that Moxon was a citizen of London, that he was a member of the monopoly trading company the Merchant Adventurers, that he had property in Yorkshire, or that he had marriage prospects with a woman who would bring a substantial dowry. It later became apparent that these indicia were untrue. None of them had been difficult to verify, but the clothiers did not bother to do so.

Similarly, when Paul Barrowe, a London silk merchant, wanted to buy large quantities of cloth on credit, his potential trading partners considered only Barrowe’s fashionable shop in a fashionable location and the fact that he seemed able to pay cash for a third of the purchase price of the goods he bought. The sellers thought these signals meant that Barrowe was wealthy, and they gladly extended him significant credit on that assumption. It turned out, however, that the shop and the cash were a ruse set up by an older, well-respected merchant named Maurice Llewellyn. And yet, despite a public lawsuit for this fraud against Barrowe and Llewellyn, they both remained in business and in the good graces of their guild.

Reputation had many deficits as a source of information in the seventeenth century, as presumably it does today. As the Moxon case demonstrated, those relying on reputational information may fail to verify its veracity. Reputation also provides merely historical information, which may not accurately predict a future malign intent. Paul Barrowe seems to have been an honest dealer before entering into the scam with Llewellyn, so the sellers had no reason to suspect him of potential false dealing.

Third, even if one tries to make inquiries, accurate information about a person’s true honesty or creditworthiness may be scarce or secret. We know from early modern business correspondence that merchants with nuggets of useful news about the untrustworthiness of others sometimes wanted to keep that intelligence to themselves because it could profit their own business if their competitors continued to trade with the cheater.

Fourth, although reputations are presumed to be slow to change within closed groups, in fact gossip may be fickle, and it can influence the listener in subtle ways. What one believes about a potential trading partner’s reputation may depend upon the most recent gossip one has heard.

Finally, the alleged cheater who produces a convincing counternarrative may succeed in creating uncertainty about which available reputational information is most accurate. Thomas Moxon told a story about a lawsuit over his inheritance of land in Yorkshire to explain his absences, his reliance on Skynner to sell the cloth Moxon had bought, and his allegedly temporary lack of funds. The lawsuit did, in fact, occur, but whether it explained Moxon’s behavior was a matter each person who heard about Moxon and Skynner’s fraud had to assess for themselves. Some might believe Moxon to have been innocent—merely a victim of misfortune. Others, crediting more the clothiers’ side of the story, would consider him a fraudster. The muddying of the pool of reputational information makes clear judgments difficult and can permit those who act opportunistically, but who have a good cover story, to remain in business, as, for example, Skynner did.

The ease with which indicia of reputation can be manipulated and the difficulty in establishing accurate information about a person lessens reputation’s practical role as a brake against fraud in privately ordered systems. Indeed, con men—and public relations experts—thrive precisely on the malleability of reputation and people’s willingness to trust without verifying. Even within the tightly-knit networks of early modern London merchants, reputation information could not keep up with the machinations of cheaters.

Emily Kadens is a Professor of Law at the University of Northwestern.