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Firm Reputation with Hidden Information

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, and the general equilibrium analysis links the value of a name to the market for services. This link 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 a failure.

Author(s)
Steven Tadelis
Publication Date
July, 2001