Summary
An adverse selection model of firm reputation is developed in which short-lived clients purchase services from firms operated by overlapping generations of agents. A firm’s only asset is its name, or reputation, and trade of names is not observed by clients. As a result, names are traded in all equilibria regardless of the economy’s horizon The general equilibrium analysis links the value of a name to the market for services. This causes a non-monotonicity that precludes higher types from sorting themselves through the market for names, and leads to “sensible” dynamics: reputations, and name prices, increase after success and decrease after failure.
I thank Jon Levin, Eric Maskin and Drew Fudenberg for valuable discussions, and Heski Bar-Isaac for comments on an earlier draft. Financial support from the National Science Foundation (NSF grants SBR-9818981 and SES-0079876) is gratefully acknowledged. This paper replaces an older (and incomplete) working paper titled “Reputation with Hidden Information”.
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© 2004 Springer-Verlag Berlin Heidelberg
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Tadelis, S. (2004). Firm reputation with hidden information. In: Aliprantis, C.D., Arrow, K.J., Hammond, P., Kubler, F., Wu, HM., Yannelis, N.C. (eds) Assets, Beliefs, and Equilibria in Economic Dynamics. Studies in Economic Theory, vol 18. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-05858-9_26
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DOI: https://doi.org/10.1007/978-3-662-05858-9_26
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