Promoting a reputation for quality

Abstract

AbstractI model a firm that invests in the quality of its product and influences how that quality is disclosed. The firm can promote its product; at random intervals it can disclose quality for a cost. At low reputations, promotion allows a firm to reestablish itself and the firm invests to take advantage of this. However, the ability to promote crowds out incentives for investment at high reputations generated by other information sources, in particular information that is generated whenever the firm is selling a low quality product, leading to reputation cycles in settings where high reputations would have otherwise persisted.