A Reputational Theory of Firm Dynamics

Moritz Meyer-ter-Vehn and Simon Board
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Moritz Meyer-ter-Vehn: UCLA

No 427, 2015 Meeting Papers from Society for Economic Dynamics

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.

Date: 2015
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-dge and nep-mic
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Journal Article: A Reputational Theory of Firm Dynamics (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:427

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