American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Product Recalls and Firm Reputation
American Economic Journal: Microeconomics
vol. 13,
no. 3, August 2021
(pp. 404–42)
Abstract
Product recall data and information on stock price reactions to recalls are used to estimate the value of reputation in a model in which product quality is not contractible. A recall is the result of a product defect that signals low effort. The recall triggers a reduction in the firm's product price and value, which then both rise steadily until its next defect occurs. We estimate that reputation accounts for 8.3 percent of firm value and that welfare is 26 percent of its first best level. A policy intervention that attains first best is a recall tax accompanied by a flow subsidy.Citation
Jovanovic, Boyan. 2021. "Product Recalls and Firm Reputation." American Economic Journal: Microeconomics, 13 (3): 404–42. DOI: 10.1257/mic.20180396Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- L25 Firm Performance: Size, Diversification, and Scope
- L62 Automobiles; Other Transportation Equipment; Related Parts and Equipment
- M31 Marketing
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