Working Paper: NBER ID: w17898
Authors: Andrew Atkeson; Christian Hellwig; Guillermo Ordonez
Abstract: We study a market with free entry and exit of firms who can produce high-quality output by making a costly but efficient initial unobservable investment. If no learning about this investment occurs, 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. If the market operates with spot prices, simple regulation can enhance the role of reputation to induce investment, thus mitigating the "lemons problem" and improving welfare.
Keywords: Regulation; Reputation; Lemons Problem; Market Efficiency
JEL Codes: D21; D82; L15; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory interventions (G18) | reputation incentives (D82) |
| reputation incentives (D82) | welfare (I38) |
| entry regulation (Y20) | firm incentives to produce high-quality goods (L15) |
| firm incentives to produce high-quality goods (L15) | overall quality mix of entrants (L15) |
| overall quality mix of entrants (L15) | mitigate lemons problem (L15) |
| entry fees + production subsidies (L11) | welfare outcomes close to first-best allocation (D69) |
| increase in entry fees (Z38) | higher quality entry (L15) |
| higher quality entry (L15) | improved welfare outcomes (I38) |