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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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