The Reputation of an Organization and its Dynamics

Tianxi Wang

Economics Discussion Papers from University of Essex, Department of Economics

Abstract: The Reputation of a natural person is anchored by his type, the characterisitics invariant over time. Since the members change from time to time, an organization has no type. Then how can it derive reputation now from its past? And if it bears reputation without backed by a fixed type, what is the reputation's dynamic? The paper presents an OLG model to address the two questions in which an organization is purely a name used consecutively by its owners, each working for one period only. It is common knowledge that today's owner has nothing to do with yesterday's. However, in the second-best equilibrium, names with good histories are owned by high quality sellers. Thus reputed names keep performing well, making sense of reputation. To enable high quality sellers outbid low quality ones for reputed names, the reputation has to have some specific dynamics. The paper fully derives the dynamics in the second-best, which has the four features: (1) increasing after a success; (2) decreasing after a failure; (3) destroyed by it totally when the reputation is already low enough; (4)top firms keeping their reputation even after a failure since they set honest prices that tell the quality of their products. These features are empirically testable.

Date: 2007
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