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Selling Reputation When Going out of Business

  • Hendrik Hakenes
  • Martin Peitz

Is the reputation of a firm tradeable when the previous owner has to retire even though ownership change is observable? We consider a competitive market in which a share of owners must retire in each period. New owners, observing only recent profits, bid for the firms on sale. Customers are concerned with the owners’ type, which reflects the quality of the good or service provided. When a customer observes an ownership change, he may have an incentive to switch to a different firm even if his past experience was good. However, we show that, in equilibrium, customers believe that also the new owner is of the good type. Hence reputation is tradeable, although ownership change is observable. In our model, reputation is an intangible asset, embodied in an attractive customer base. Firms owned by a good type sell at a premium.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1213.

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Date of creation: 2004
Date of revision:
Handle: RePEc:ces:ceswps:_1213
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  1. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  2. Luis Cabral, 2000. "Stretching Firm and Brand Reputation," Working Papers 00-07, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Aumann, Robert J. & Heifetz, Aviad, 2001. "Incomplete Information," Working Papers 1124, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Steven Tadelis, 2003. "Firm reputation with hidden information," Economic Theory, Springer, vol. 21(2), pages 635-651, 03.
  5. Ausubel, Lawrence M. & Cramton, Peter & Deneckere, Raymond J., 2002. "Bargaining with incomplete information," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 3, chapter 50, pages 1897-1945 Elsevier.
  6. repec:oup:restud:v:65:y:1998:i:4:p:655-69 is not listed on IDEAS
  7. repec:oup:qjecon:v:98:y:1983:i:4:p:659-79 is not listed on IDEAS
  8. Steven Tadelis, 1999. "What's in a Name? Reputation as a Tradeable Asset," American Economic Review, American Economic Association, vol. 89(3), pages 548-563, June.
  9. Rafael Rob, 2004. "Is Bigger Better? Investing in Reputation," Theory workshop papers 658612000000000086, UCLA Department of Economics.
  10. Steven Tadelis, 2002. "The Market for Reputations as an Incentive Mechanism," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 854-882, August.
  11. Gschwend, Thomas, 2004. "Ticket-Splitting and Strategic Voting," Sonderforschungsbereich 504 Publications 05-06, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  12. repec:oup:restud:v:68:y:2001:i:2:p:415-41 is not listed on IDEAS
  13. Andersson, Fredrik, 2002. "Pooling reputations," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 715-730, May.
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