Firm Reputation with Hidden Information
27 Pages Posted: 2 Jan 2001
Date Written: January 2002
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 a success and decrease after failure.
Keywords: Reputation as an asset, trade of names, overlapping generations
JEL Classification: C70, D80, L14
Suggested Citation: Suggested Citation