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Reputation-Driven Industry Dynamics

  • Bernardita Vial
  • Felipe Zurita

This paper studies the entry-exit dynamics of an experience good industry. Consumers observe noisy signals of past firm behavior and hold common beliefs regarding their types, or reputations. There is a small chance that firms may independently and unobservably be exogenously replaced. The market is perfectly competitive: entry is free, and all participants are price-takers. Entrants have an endogenous reputation uE. In the steady-state equilibrium, uE is the lowest reputation among active firms: firms that have done poorly leave the market, and some re-enter under a new name. This endogenous replacement of names drives the industry dynamics. In particular, exit probabilities are higher for younger firms, for inept firms, and for firms with worse reputations. Competent firms have stochastically larger reputations than inept firms both in the population as a whole and within each cohort, and thus are able to live longer and charge higher prices.

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File URL: http://www.economia.puc.cl/docs/dt_436.pdf
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Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 436.

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Date of creation: 2013
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Handle: RePEc:ioe:doctra:436
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  1. Vial Bernardita, 2010. "Walrasian Equilibrium and Reputation under Imperfect Public Monitoring," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-44, May.
  2. 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.
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  4. Andrew Atkeson & Christian Hellwig & Guillermo L. Ordonez, 2012. "Optimal regulation in the presence of reputation concerns," Staff Report 464, Federal Reserve Bank of Minneapolis.
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  9. Tianxi Wang, 2011. "The Dynamics Of Names: A Model Of Reputation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 1039-1058, November.
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  14. George J. Mailath & Larry Samuelson, . "Who Wants a Good Reputation?," Penn CARESS Working Papers a3e3219aee004bd237f8112f9, Penn Economics Department.
  15. 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.
  16. Mailath, George J & Samuelson, Larry, 2001. "Who Wants a Good Reputation? Erratum," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 714, July.
  17. Fuente,Angel de la, 2000. "Mathematical Methods and Models for Economists," Cambridge Books, Cambridge University Press, number 9780521585293.
  18. Rafael Rob & Arthur Fishman, 2005. "Is Bigger Better? Customer Base Expansion through Word-of-Mouth Reputation," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1146-1175, October.
  19. Ryan C. McDevitt, 2011. "Names and Reputations: An Empirical Analysis," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 193-209, August.
  20. 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.
  21. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796, March.
  22. Levine, David K. & Martinelli, Cesar, 1998. "Reputation with Noisy Precommitment," Journal of Economic Theory, Elsevier, vol. 78(1), pages 55-75, January.
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