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A Reputational Theory of Firm Dynamics

  • Simon Board
  • Moritz Meyer-ter-Vehn
American Economic Journal: Microeconomics
vol. 14, no. 2, May 2022
(pp. 44-80)
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Abstract

We study the life cycle of a firm that produces a good of unknown quality. The firm manages its quality by investing while consumers learn via public breakthroughs; if the firm fails to generate such breakthroughs, its revenue falls and it eventually exits. Optimal investment depends on the firm's reputation (the market's belief about its quality) and self-esteem (the firm's own belief about its quality), and is single-peaked in the time since a breakthrough. We derive predictions about the distribution of revenue and propose a method to decompose the impact of policy changes into investment and selection effects.

Citation

Board, Simon, and Moritz Meyer-ter-Vehn. 2022. "A Reputational Theory of Firm Dynamics." American Economic Journal: Microeconomics, 14 (2): 44-80. DOI: 10.1257/mic.20190376

Additional Materials

JEL Classification

  • D11 Consumer Economics: Theory
  • D21 Firm Behavior: Theory
  • D25 Intertemporal Firm Choice: Investment, Capacity, and Financing
  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • L15 Information and Product Quality; Standardization and Compatibility
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