Working Paper: NBER ID: w22703
Authors: Boyan Jovanovic; Julien Prat
Abstract: This paper shows that endogenous cycles can arise when contracts between firms and their customers are incomplete and when products are experience goods. Then firms invest in the quality of their output in order to establish a good reputation. Cycles arise because investment in reputation causes self-fulfilling changes in the discount factor. Cycles are more likely to occur when information diffuses slowly and consumers exhibit high risk aversion. A rise in idiosyncratic uncertainty is of two kinds that work in opposite ways: Noise in observing effort is contractionary as it generally is in agency models. But a rise in the variance of the distribution of abilities is expansionary. A calibrated version produces realistic fluctuations in terms of peak-to-trough movements in consumption and the spacing of time between recessions.
Keywords: endogenous fluctuations; reputation; intangible capital
JEL Codes: E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investment in reputation (G24) | discount factor (H43) |
| discount factor (H43) | future consumption (E21) |
| investment in reputation (G24) | future consumption (E21) |
| low current consumption (E21) | low discount factor (D15) |
| low discount factor (D15) | reduced incentive for reputation investment (D29) |
| high current consumption (E21) | high discount factor (H43) |
| high discount factor (H43) | increased reputation investment (E22) |
| reduced incentive for reputation investment (D29) | perpetuating a recession (E32) |
| increased reputation investment (E22) | leading to a boom (Q33) |