Observability and Sorting in a Market for Names

Abstract

Can firm names be tradeable assets when changes in name ownership are observable? Earlier literature focuses on trading of firm names when trading is not observable to the consumer. Yet, casual empiricism suggests that shifts in name ownership are often publicly known. This paper studies how firm names can be traded even under full observability. In equilibrium, even when consumers see a reputed name being divested they continue to trust it and so, these names are tradeable. I further demonstrate an appealing “sorting” property of these equilibria. Competent firms can separate themselves by buying valuable names, and incompetent firms can give themselves away by using worthless names.