Working Paper: NBER ID: w28009
Authors: Boyan Jovanovic
Abstract: Product-recall data and information on stock-price reactions to recalls are used to estimate the value of reputation in a model in which product quality is not contractible. A recall is the result of a product defect that signals low effort. The recall triggers a reduction in the firm's product price and value which then both rise steadily until its next defect occurs. We estimate that reputation accounts for 8.3 percent of firm value and that welfare is 26 percent of its first best level. A policy intervention that attains first best is a recall tax accompanied by a flow subsidy.
Keywords: No keywords provided
JEL Codes: L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| product recalls (D18) | decline in firm value (G33) |
| decline in firm value (G33) | recovery over time (C41) |
| product recalls (D18) | changes in firm valuation (G32) |
| reputation (M14) | firm value (G32) |
| welfare (I38) | market efficiency (G14) |
| recall tax and flow subsidy (H23) | market efficiency (G14) |