We thank a co-editor and three anonymous referees for their invaluable advice. We have also received helpful comments from Søren Asmussen, Andy Atkeson, Heski Bar-Isaac, Dirk Bergemann, Yeon-Koo Che, Mark Davis, Willie Fuchs, Christian Hellwig, Hugo Hopenhayn, Boyan Jovanovic, David Levine, George Mailath, Marek Pycia, Yuliy Sannikov, Ron Siegel, Jeroen Swinkels, Bill Zame, and seminar audiences at ASSA 2010, ASU, BC, Bonn, BU, CAPCP 2010, CETC 2009, Chicago, Columbia, Cowles 2009, ESWC 2010, Frankfurt, Haas, Harvard/MIT, Heidelberg, LSE, Munich, Northwestern, NYU, Ohio State, Oxford, Penn, Pitt, Princeton, SED 2009, Southampton, Stanford, Stern, SWET 2009, Toulouse, UBC, UCI, UCL, UCLA, UCSD, UNC-Duke, and UT-Austin. George Georgiadis, Kenneth Mirkin, Kyle Woodward, Yujing Xu, and Simpson Zhang provided excellent research assistance. We gratefully acknowledge financial support from NSF Grant 0922321.
Reputation for Quality
Article first published online: 13 NOV 2013
© 2013 The Econometric Society
Volume 81, Issue 6, pages 2381–2462, November 2013
How to Cite
Board, S. and Meyer-ter-Vehn, M. (2013), Reputation for Quality. Econometrica, 81: 2381–2462. doi: 10.3982/ECTA9039
- Issue published online: 13 NOV 2013
- Article first published online: 13 NOV 2013
- Manuscript received January, 2010; final revision received May, 2013.
- monitoring processes;
- firm dynamics;
We propose a model of firm reputation in which a firm can invest or disinvest in product quality and the firm's reputation is defined as the market's belief about this quality. We analyze the relationship between a firm's reputation and its investment incentives, and derive implications for reputational dynamics.
Reputational incentives depend on the specification of market learning. When consumers learn about quality through perfect good news signals, incentives decrease in reputation and there is a unique work–shirk equilibrium with ergodic dynamics. When learning is through perfect bad news signals, incentives increase in reputation and there is a continuum of shirk–work equilibria with path-dependent dynamics. For a class of imperfect Poisson learning processes and low investment costs, we show that there exists a work–shirk equilibrium with ergodic dynamics. For a subclass of these learning processes, any equilibrium must feature working at all low and intermediate levels of reputation and shirking at the top.