Reputation is a way to change many one-time Prisonner's Dilemmas into one big Iterated Prisonner's Dilemma, where mutual cooperation is the best strategy for rational players. But how exactly does it work in real life?

People are hard-wired to obey social norms and cooperate with members of their communities even in the absence of personal consequences like reputation. Most people would not steal from a stranger even if they knew they would not be caught.