Censorship and Reputation

Abstract

I study how a firm manages its reputation by investing in the quality of its product and censoring bad news. Without censorship, the threat of bad news provides strong incentives for investment. I highlight two discontinuities in the firm's maximum equilibrium payoff the introduction of censorship creates. When the cost of investment exceeds the cost of censorship, the firm never invests and a patient firm’s payoffs approach the lowest possible. In contrast, when censorship is more expensive than invesment, a patient firm's payoffs approach the first best, which can exceed the maximum equilibrium payoff if it was unable to censor.

Keywords: Reputation, Censorship, Dynamic Games

JEL Classification: C73, D82, D83, D84