Working Paper: NBER ID: w26283
Authors: Jie Bai; Ludovica Gazze; Yukun Wang
Abstract: Collective reputation implies an important externality. Among firms trading internationally, quality shocks about one firm’s products could affect the demand of other firms from the same origin country. We study this issue in the context of a large-scale scandal that affected the Chinese dairy industry in 2008. Leveraging rich firm-product level administrative data and official quality inspection reports, we find that the export revenue of contaminated firms dropped by 84% after the scandal, relative to the national industrial trend, and the spillover effect on non-contaminated firms is measured at 64% of the direct effect. Notably, firms deemed innocent by government inspections did not fare any better than noninspected firms. These findings highlight the importance of collective reputation in international trade and the challenges governments might face in signaling quality and restoring trust. Finally, we investigate potential mechanisms that could mediate the strength of the reputation spillover. We find that the spillover effects are smaller in destinations where people have better information about parties involved in the scandal. New firms are more vulnerable to the collective reputation damage than established firms. Supply chain structure matters especially in settings where firms are less vertically integrated and exhibit fragmented upstream-downstream relationships.
Keywords: collective reputation; trade; Chinese dairy industry; reputation spillovers
JEL Codes: F10; F14; L15; L66; O10; O19
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 2008 Chinese dairy scandal (D18) | export revenue of contaminated firms (Q52) |
| 2008 Chinese dairy scandal (D18) | export revenue of innocent firms (F10) |
| export revenue of innocent firms (F10) | export revenue of non-inspected firms (F10) |
| 2008 Chinese dairy scandal (D18) | reputation damage (K24) |
| better information about the scandal (Y50) | spillover effects (F69) |
| younger firms (L26) | vulnerability to collective reputation damage (D70) |
| supply chain structures (L14) | extent of reputation spillovers (F69) |