Reputation Cycles

54 Pages Posted: 3 Oct 2016

See all articles by Boyan Jovanovic

Boyan Jovanovic

New York University - Department of Economics

Julien Prat

University of Vienna; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2016

Abstract

This paper shows that endogenous cycles can arise when contracts between firms and their customers are incomplete and when products are experience goods. Then firms invest in the quality of their output in order to establish a good reputation. Cycles arise because investment in reputation causes self-fulfilling changes in the discount factor. Cycles are more likely to occur when information diffuses slowly and consumers exhibit high risk aversion. A rise in idiosyncratic uncertainty is of two kinds that work in opposite ways: Noise in observing effort is contractionary as it generally is in agency models. But a rise in the variance of the distribution of abilities is expansionary. A calibrated version produces realistic fluctuations in terms of peak-to-trough movements in consumption and the spacing of time between recessions.

Keywords: Endogenous Fluctuations, Intangible Capital, reputation

JEL Classification: E22, E32, L14

Suggested Citation

Jovanovic, Boyan and Prat, Julien, Reputation Cycles (September 2016). CEPR Discussion Paper No. DP11543, Available at SSRN: https://ssrn.com/abstract=2847077

Boyan Jovanovic (Contact Author)

New York University - Department of Economics ( email )

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New York, NY 10012
United States

Julien Prat

University of Vienna ( email )

Bruenner Strasse 72
Vienna 1210, Vienna
Austria

IZA Institute of Labor Economics

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Bonn, D-53072
Germany

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