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A Reputational Theory of Firm Dynamics

Author

Listed:
  • Moritz Meyer-ter-Vehn

    (UCLA)

  • Simon Board

    (University of California - Los Angeles)

Abstract

We propose a firm lifecycle model in which the firm privately invests in its quality and thereby its reputation. Over time, both the firm and the market learn about the firm's evolving quality via infrequent breakthroughs. The firm can also exit if its value becomes negative, giving rise to selection effects. In a pure-strategy equilibrium, incentives are single-peaked: the firm shirks immediately following a breakthrough, works for intermediate levels of reputation and shirks again when it is about to exit. This investment behavior yields predictions for the distribution of firm productivity and the survival rate. Finally, we compare the model to two variants: one in which the firm's investment is publicly observed, and a second in which the firm has private information about its product quality.

Suggested Citation

  • Moritz Meyer-ter-Vehn & Simon Board, 2015. "A Reputational Theory of Firm Dynamics," 2015 Meeting Papers 427, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:427
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    References listed on IDEAS

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    7. Andrew Atkeson & Christian Hellwig & Guillermo Ordoñez, 2015. "Optimal Regulation in the Presence of Reputation Concerns," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(1), pages 415-464.
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    10. Simon Board & Moritz Meyer‐ter‐Vehn, 2013. "Reputation for Quality," Econometrica, Econometric Society, vol. 81(6), pages 2381-2462, November.
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    2. Kuo, Fang-Chang, 2024. "Shirking with good reputation? Evidence from hotel industry," International Journal of Industrial Organization, Elsevier, vol. 97(C).

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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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