Product Recalls and Firm Reputation

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 pric...

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Bibliographic Details
Published in:American economic journal. Microeconomics 2021-08, Vol.13 (3), p.404-442
Main Author: Jovanovic, Boyan
Format: Article
Language:English
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Summary: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.
ISSN:1945-7669
1945-7685
DOI:10.1257/mic.20180396