Optimal Regulation in the Presence of Reputation Concerns

Andrew Atkeson, Ordoñez, Guillermo and Christian Hellwig
Authors registered in the RePEc Author Service: Guillermo L. Ordonez

No 10080, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In all markets, firms go through a process of creative destruction: entry, random growth and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, 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. We show that, if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production.

Keywords: Entry regulation; Firm dynamics; Quality investments; Reputation concerns (search for similar items in EconPapers)
JEL-codes: D83 L51 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-cta, nep-dge and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Optimal Regulation in the Presence of Reputation Concerns (2015)
Working Paper: Optimal regulation in the presence of reputation concerns (2012)
Working Paper: Optimal Regulation in the Presence of Reputation Concerns (2012)
Working Paper: Optimal Regulation in the Presence of Reputation Concerns (2009)
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