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Optimal Regulation in the Presence of Reputation Concerns

Author

Listed:
  • Andrew Atkeson
  • Christian Hellwig
  • Guillermo Ordoñez

Abstract

In all markets, firms go through a process of creative destruction: entry, random growth, and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, an extreme "lemons problem" develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. We show that if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production. JEL Codes: D21, D82, L15, L51.

Suggested Citation

  • Andrew Atkeson & Christian Hellwig & Guillermo Ordoñez, 2015. "Optimal Regulation in the Presence of Reputation Concerns," The Quarterly Journal of Economics, Oxford University Press, vol. 130(1), pages 415-464.
  • Handle: RePEc:oup:qjecon:v:130:y:2015:i:1:p:415-464
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    File URL: http://hdl.handle.net/10.1093/qje/qju034
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ordoñez, Guillermo L., 2013. "Fragility of reputation and clustering of risk-taking," Theoretical Economics, Econometric Society, vol. 8(3), September.
    2. Moritz Meyer-ter-Vehn & Simon Board, 2015. "A Reputational Theory of Firm Dynamics," 2015 Meeting Papers 427, Society for Economic Dynamics.
    3. repec:aea:aejmac:v:10:y:2018:i:1:p:33-56 is not listed on IDEAS
    4. Julien Prat & Boyan Jovanovic, 2015. "Reputation Cycles," 2015 Meeting Papers 971, Society for Economic Dynamics.
    5. Jacek Rothert, 2015. "Monitoring, moral hazard, and turnover," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 355-374, February.
    6. Jolivet, Grégory & Jullien, Bruno & Postel-Vinay, Fabien, 2016. "Reputation and prices on the e-market: Evidence from a major French platform," International Journal of Industrial Organization, Elsevier, vol. 45(C), pages 59-75.
    7. Grégory Jolivet & Bruno Jullien & Fabien Postel-Vinay, 2014. "Reputation and Pricing on the e-Market: Evidence from a Major French Platform," Sciences Po publications info:hdl:2441/4firg7dmo68, Sciences Po.
    8. Mihaela Schaar & Simpson Zhang, 2015. "A dynamic model of certification and reputation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(3), pages 509-541, April.
    9. Guillermo Ordoñez, 2018. "Sustainable Shadow Banking," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(1), pages 33-56, January.
    10. Bruno Jullien & In-Uck Park, 2009. "Seller Reputation and Trust in Pre-Trade Communication," Levine's Working Paper Archive 814577000000000330, David K. Levine.
    11. Bruno Jullien & In-Uck Park, 2014. "New, Like New, or Very Good? Reputation and Credibility," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1543-1574.
    12. Bernardita Vial & Felipe Zurita, 2013. "Reputation-Driven Industry Dynamics," Documentos de Trabajo 436, Instituto de Economia. Pontificia Universidad Católica de Chile..
    13. Chia-Hui Chen & Junichiro Ishida, 2017. "Rewarding Mediocrity? Optimal Regulation of R&D Markets with Reputation Concerns," ISER Discussion Paper 0994, Institute of Social and Economic Research, Osaka University.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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