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Optimal Regulation in the Presence of Reputation Concerns

  • Andrew Atkeson
  • Christian Hellwig
  • Guillermo Ordonez

We study a market with free entry and exit of firms who can produce high-quality output by making a costly but efficient initial unobservable investment. If no learning about this investment occurs, 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. If the market operates with spot prices, simple regulation can enhance the role of reputation to induce investment, thus mitigating the "lemons problem" and improving welfare.

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File URL: http://www.nber.org/papers/w17898.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17898.

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Date of creation: Mar 2012
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Publication status: published as 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:nbr:nberwo:17898
Note: EFG IO
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