Here is an interesting analysis by Gordon Tullock in Quarterly Journal of Economics, ”Adam Smith and the Prisoners’ Dilemma” (pdf). He says:
I think this point has come up in earlier discussions about reputation economics, but rather than seeing it as breaking the reputation system it might be one of the dark sides of social life in the outer solar system. There is a class of people with bad reputations who simply have no incentives to play nice (beyond avoiding being so annoying they get thrown out an airlock). They are the real scum, and of course are shunned by everybody. Which makes them even more interested in faking their identities, participating in criminal endeavours (where lack of reciprocity is more common) and doing whatever it takes to get what they want. Note that the same effect also applies in the inner system: having a very bad c-rep might hurt you far more than a bad reputation today, because current reputations are so local and unstable. So the hypercorp that is losing its rep might actually decide to play hardball because it has little to lose. With more forgetful/forgiving reputations they would maybe instead just lay low for a while after a scandal. If an individual has lost reputation, there is little or no reason why he should play cooperative strategies in the future. If anyone agrees to play with him, which is not terribly likely, it would take a large number of plays before his reputation for reliability was as good as that of the person who had not already blotted his copy book even if he played cooperatively each time. Under the circumstances, he should attempt to con people into games, and when he gets them in, the decision to play noncooperatively may well be perfectly rational. All of this would provide one more explanation for the tendency of people who once slipped to continue on that course of action. Thus, the habitual criminal or the ”shady” businessman who continues to be ”shady” are both responding rationally to their situation. Once they have a bad reputation, the cost of building up a reputation for reliability is extremely high.