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Collective reputation with stochastic production and unknown willingness to pay for quality

Fulvio Fontini, Katrin Millock () and Michele Moretto

Environmental Economics and Policy Studies, 2018, vol. 20, issue 2, 387-410

Abstract: Abstract In many cases, consumers cannot observe a single firm’s investment in environmental quality or safety, but only the average quality of the industry. The outcome of the investment is stochastic, since firms cannot control perfectly the technology or external factors that may affect production. In addition, firms do not know consumers’ valuation of quality. We characterize the solution of the firms’ investment game and show that the value of stopping investments when firms are already investing in quality can be negative when the free-riding incentives dominate. The existence of systematic uncertainty on the outcome of investment slows down investment in quality, compared to a situation without uncertainty. The uncertainty on consumers’ willingness to pay for quality can speed up or slow down investment. We also obtain the counterintuitive result that information acquisition may decrease the overall level of quality.

Keywords: Collective reputation; Dynamic game; Real options; Stochastic quality (search for similar items in EconPapers)
JEL-codes: C73 D92 Q52 (search for similar items in EconPapers)
Date: 2018
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