Journal Article

Who Wants a Good Reputation?

George J. Mailath and Larry Samuelson

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 68, issue 2, pages 415-441
Published in print April 2001 | ISSN: 0034-6527
Published online April 2001 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00175
Who Wants a Good Reputation?

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We examine a market in which long-lived firms face a short-term incentive to exert low effort, but could earn higher profits if it were possible to commit to high effort. There are two types of firms, “inept” firms who can only exert low effort, and “competent” firms who have a choice between high and low effort. There is occasional exit, and competent and inept potential entrants compete for the right to inherit the departing firm's reputation. Consumers receive noisy signals of effort choice, and so competent firms choose high effort in an attempt to distinguish themselves from inept firms. A competent firm is most likely to enter the market by purchasing an average reputation, in the hopes of building it into a good reputation, than either a very low reputation or a very high reputation. Inept firms, in contrast, find it more profitable to either buy high reputations and deplete them or buy low reputations.

Journal Article.  0 words. 

Subjects: Economics

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