Optimal regulation in the presence of reputation concerns

Andrew Atkeson, Christian Hellwig and Guillermo L. Ordonez ()

No 464, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We study a market with free entry and exit of firms who can produce high-quality output by making a costly but efficient initial unobservable investment. If no learning about this investment occurs, 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. If the market operates with spot prices, simple regulation can enhance the role of reputation to induce investment, thus mitigating the “lemons problem” and improving welfare.

New Economics Papers: this item is included in nep-cta, nep-ind and nep-mic
Date: 2012
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Related works:
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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