IDEAS home Printed from https://ideas.repec.org/p/red/sed015/427.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2015/paper_427.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 326-365, June.
    2. Douglas Gale & Robert W. Rosenthal, 1994. "Price and Quality Cycles for Experience Goods," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 590-607, Winter.
    3. George J. Mailath & Larry Samuelson, 2001. "Who Wants a Good Reputation?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(2), pages 415-441.
    4. Alessandro Bonatti & Johannes Horner, 2011. "Collaborating," American Economic Review, American Economic Association, vol. 101(2), pages 632-663, April.
    5. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(1), pages 53-82.
    6. 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.
    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.
    8. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
    9. Bart J. Bronnenberg & Jean-Pierre H. Dube & Matthew Gentzkow, 2012. "The Evolution of Brand Preferences: Evidence from Consumer Migration," American Economic Review, American Economic Association, vol. 102(6), pages 2472-2508, October.
    10. Simon Board & Moritz Meyer‐ter‐Vehn, 2013. "Reputation for Quality," Econometrica, Econometric Society, vol. 81(6), pages 2381-2462, November.
    11. Heski Bar-Isaac, 2003. "Reputation and Survival: Learning in a Dynamic Signalling Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 231-251.
    12. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    13. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luís Cabral & Ali Hortacsu, 2004. "The Dynamics of Seller Reputation: Theory and Evidence from eBay," Working Papers 04-05, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Hortacsu, Ali, 2005. "Trust and Reputation on eBay: Micro and Macro Perspectives," Department of Economics, Working Paper Series qt8vj7d50q, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. Bernardita Vial & Felipe Zurita, 2013. "Reputation-Driven Industry Dynamics," Documentos de Trabajo 436, Instituto de Economia. Pontificia Universidad Católica de Chile..
    4. Grégory Jolivet & Bruno Jullien & Fabien Postel-Vinay, 2014. "Reputation and Pricing on the e-Market: Evidence from a Major French Platform," SciencePo Working papers Main hal-03460312, HAL.
    5. Jaan Masso & Amaresh K Tiwari, 2021. "Productivity Implications Of R&D, Innovation And Capital Accumulation For Incumbents And Entrants: The Case Of Estonia," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 130, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    6. Mauro Caselli & Arpita Chatterjee & Shengyu Li, 2023. "Productivity and Quality of Multi-product Firms," Discussion Papers 2023-10, School of Economics, The University of New South Wales.
    7. Tran, Hien Thu, 2019. "Institutional quality and market selection in the transition to market economy," Journal of Business Venturing, Elsevier, vol. 34(5), pages 1-1.
    8. Lucia Foster & Cheryl Grim & John Haltiwanger, 2016. "Reallocation in the Great Recession: Cleansing or Not?," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages 293-331.
    9. Giovanni Dosi & Marcelo C. Pereira & Maria Enrica Virgillito, 2017. "The footprint of evolutionary processes of learning and selection upon the statistical properties of industrial dynamics," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 26(2), pages 187-210.
    10. Giovanni Dosi & Daniele Moschella & Emanuele Pugliese & Federico Tamagni, 2015. "Productivity, market selection, and corporate growth: comparative evidence across US and Europe," Small Business Economics, Springer, vol. 45(3), pages 643-672, October.
    11. Hortaçsu, Ali & Syverson, Chad, 2009. "Why Do Firms Own Production Chains?," Working Papers 227, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    12. Grégory Jolivet & Bruno Jullien & Fabien Postel-Vinay, 2014. "Reputation and Pricing on the e-Market: Evidence from a Major French Platform," PSE Working Papers hal-03460312, HAL.
    13. Florin Maican & Matilda Orth, 2017. "Productivity Dynamics and the Role of ‘Big-Box’ Entrants in Retailing," Journal of Industrial Economics, Wiley Blackwell, vol. 65(2), pages 397-438, June.
    14. Bonatti, Alessandro & Hörner, Johannes, 2017. "Career concerns with exponential learning," Theoretical Economics, Econometric Society, vol. 12(1), January.
    15. Jolivet, Grégory & Jullien, Bruno & Postel-Vinay, Fabien, 2016. "Reputation and prices on the e-market: Evidence from a major French platform," International Journal of Industrial Organization, Elsevier, vol. 45(C), pages 59-75.
    16. Romano, Livio, 2019. "Explaining growth differences across firms: The interplay between innovation and management practices," Structural Change and Economic Dynamics, Elsevier, vol. 49(C), pages 130-145.
    17. Stefano Bianchini & Giulio Bottazzi & Federico Tamagni, 2017. "What does (not) characterize persistent corporate high-growth?," Small Business Economics, Springer, vol. 48(3), pages 633-656, March.
    18. Fredrik Heyman & Pehr-Johan Norbäck & Lars Persson, 2019. "The Turnaround of the Swedish Economy: Lessons from Large Business Sector Reforms," The World Bank Research Observer, World Bank, vol. 34(2), pages 274-308.
    19. 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.
    20. G. Jacob Blackwood & Lucia S. Foster & Cheryl A. Grim & John Haltiwanger & Zoltan Wolf, 2021. "Macro and Micro Dynamics of Productivity: From Devilish Details to Insights," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(3), pages 142-172, July.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed015:427. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.