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Quality Investments in the 11th Hour

Moritz Meyer-ter-Vehn () and Simon Board ()

No 1275, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: If the firm does not know its own quality, we show that the firm stops investing when its reputation gets close to the exit threshold and its life-expectancy vanishes. If the firm knows its own quality, to the contrary, we show that the firm optimally invests until its reputation falls to the point where the low-quality firm exits the market. While the life-expectancy of a low-quality firm vanishes, investment remains profitable because investment success, that increases the firm’s quality, averts exit.

Date: 2010
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More papers in 2010 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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