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A Reputational Theory of Firm Dynamics†

A Reputational Theory of Firm Dynamics† AbstractWe 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. (JEL D11, D21, D25, D83, G31, L15) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

A Reputational Theory of Firm Dynamics†

A Reputational Theory of Firm Dynamics†

American Economic Journal: Microeconomics , Volume 14 (2) – May 1, 2022

Abstract

AbstractWe 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. (JEL D11, D21, D25, D83, G31, L15)

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Publisher
American Economic Association
Copyright
Copyright © 2022 © American Economic Association
ISSN
1945-7685
DOI
10.1257/mic.20190376
Publisher site
See Article on Publisher Site

Abstract

AbstractWe 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. (JEL D11, D21, D25, D83, G31, L15)

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: May 1, 2022

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