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A Reputational Theory of Firm Dynamics

Author

Listed:
  • Simon Board
  • Moritz Meyer-ter-Vehn

Abstract

We study the life cycle of a firm that produces a good of unknown quality. The firm manages its quality by investing while consumers learn via public breakthroughs; if the firm fails to generate such breakthroughs, its revenue falls and it eventually exits. Optimal investment depends on the firm's reputation (the market's belief about its quality) and self-esteem (the firm's own belief about its quality), and is single-peaked in the time since a breakthrough. We derive predictions about the distribution of revenue and propose a method to decompose the impact of policy changes into investment and selection effects.

Suggested Citation

  • Simon Board & Moritz Meyer-ter-Vehn, 2022. "A Reputational Theory of Firm Dynamics," American Economic Journal: Microeconomics, American Economic Association, vol. 14(2), pages 44-80, May.
    • Handle: RePEc:aea:aejmic:v:14:y:2022:i:2:p:44-80
    DOI: 10.1257/mic.20190376
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    Cited by:

    1. Kuo, Fang-Chang, 2024. "Shirking with good reputation? Evidence from hotel industry," International Journal of Industrial Organization, Elsevier, vol. 97(C).

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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