Monday, February 15, 2016

Asymmetry of Reputation Loss and Recovery under Endogenous Partnerships: Theory and Evidence

Access the publisher's website International Economic Review 57, 1 (2016) 3-30

This article is inspired by real-world phenomena that firms lose customers based on imprecise information and take a long time to recover. If consumers are playing an ordinary repeated game with fixed partners, there is no clear reason why recovery happens slowly. However, if consumers are playing an endogenously repeated game, a class of simple efficient equilibria exhibits the asymmetry of fast loss and slow recovery of customers after a bad signal. Exit is systematic, but formation of a new partnership is random. We also give empirical evidence of our equilibria at an individual-firm level.