Optimal Regulation in the Presence of Reputation Concerns

Atkeson, Andrew, Hellwig, Christian and Ordonez, Guillermo (2015) Optimal Regulation in the Presence of Reputation Concerns. The Quarterly Journal of Economics, 130 (1). pp. 415-464.

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Official URL: http://tse-fr.eu/pub/28686

Abstract

In all markets, firms go through a process of creative destruction: entry, random growth and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, an extreme “lemons problem” develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. We show that, if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production

Item Type: Article
Language: English
Date: 2015
Refereed: Yes
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:51
Last Modified: 24 Jan 2019 00:10
OAI ID: oai:tse-fr.eu:28686
URI: http://publications.ut-capitole.fr/id/eprint/16616

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