Reputation And State Commodity Promotion: The Case Of Washington Apples

A dynamic multiple-indicator multiple-cause (MIMIC) framework was used to estimate the latent variable reputation with price premiums for Washington apples and attributes that covered the period July 1996 to November 1999. A maximum likelihood two-stage approach was employed. For comparison purposes, a hedonic regression was also estimated. Results from the first stage of the estimation procedure in the MIMIC reputation model suggest that price premiums are good indicators of reputation. The indicator coefficients, also called factor loadings, imply that the estimated reputation variable is common to the five indicators chosen and that the measurement of reputation is not likely to be obscured by a wide diversity in the indicators. The common factor issue suggests a possible existence of collective 'Washington' reputation. Results from the second stage of the MIMIC reputation model are compared to those from the Hedonic proxy model. In general, results from the MIMIC reputation model make more intuitive sense and are in line with the theoretical literature on reputation than the results from the Hedonic proxy model. Reputation is found to be stationary and that shocks to Washington's reputation are temporary. In the MIMIC reputation model, all the estimated coefficients on the explanatory cause variables had positive signs, except the Red Delicious variety variable. The magnitude of the coefficient on the logo term is large, suggesting a strong impact on reputation. The estimated constant term in the MIMIC reputation model is negative and relatively large, which suggests that reputation is declining. The concerns of declining perceived "eating" quality in Washington varieties thus appear to be real. It appears then that the apple industry is currently benefiting from past/accrued reputation. The current standards in the apple industry give room for some Washington producers to free ride on the collective reputation. Hence, there may be some justification for minimum quality standards. For efficient public policy purposes, our findings suggest that policymakers and the apple industry as a whole should consider reputation in their cost-benefit analysis for purposes of resource allocation.