Reputation building through costly adjustment

Francesc Dilme

Journal of Economic Theory, 2019, vol. 181, issue C, 586-626

Abstract: This paper analyzes quality and reputation management in the presence of adjustment costs. A firm produces and sells experience goods over time. The firm can choose the product quality at any time, but changing it requires a costly investment. Customers learn about the product quality through a quality-dependent Poisson process. We characterize reputational dynamics, showing that the arrival of news may generate jumps in both the firm's quality choice and its reputation. We characterize the set of equilibria as a function of the adjustment costs, and show that the firm can benefit from increased adjustment costs as such costs enhance the credibility of its decisions.

Keywords: Reputation; Adjustment costs; Endogenous types (search for similar items in EconPapers)
JEL-codes: C73 D21 D83 L14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:181:y:2019:i:c:p:586-626

DOI: 10.1016/j.jet.2019.03.010

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