Seminar

A Reputational Theory of Firm Dynamics

Simon Board (University of California - Los Angeles)

May 15, 2014, 11:00–12:30

Toulouse

Room MS003

Economic Theory Seminar

Abstract

We propose an industry lifecycle model in which each firm privately invests into its quality and thereby its reputation. Over time, both the firm and the market learn about the firm's evolving quality via infrequent breakthroughs. The firm can also exit if its value becomes negative, giving rise to selection within the industry. In a pure-strategy equilibrium, incentives are single-peaked: the firm shirks immediately following a breakthrough, works for intermediate levels of reputation and shirks again when it is about to exit. This investment behavior yields predictions for the distribution of firm productivity and the turnover rate. Finally, we compare the model to two variants: one in which the firm's investment is publicly observed, and a second where the firm has private information about its product quality.