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

Fulvio Fontini, Katrin Millock () and Michele Moretto
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Katrin Millock: PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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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)
Date: 2018-04
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Published in Environmental Economics and Policy Studies, 2018, 20 (2), pp.387-410

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Journal Article: Collective reputation with stochastic production and unknown willingness to pay for quality (2018)
Working Paper: Collective reputation with stochastic production and unknown willingness to pay for quality (2018)
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