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Collective Reputation with Stochastic Production and and Unknown Willingness to Pay for Quality
Environmental Economics and Policy Studies (2017)
  • Katrin Millock
  • Fulvio Fontini, University of Padova
  • Michele Moretto, University of Padova
Abstract
In many cases consumers cannot observe a single firm's investment in environmental quality or safety, but only the average quality of the industry. The outcome of the investment is stochastic since firms cannot control perfectly the technology or external factors that may affect production. In addition, firms do not know consumers' valuation of quality. We characterize the solution of the firms' investment game and show that the value of stopping investments when firms are already investing in quality can be negative when the free-riding incentives dominate. The existence of systematic uncertainty on the outcome of investment slows down investment in quality, compared to a situation without uncertainty. The uncertainty on consumers' willingness to pay for quality can speed up or slow down investment. We also obtain the counterintuitive result that information acquisition may decrease the overall level of quality.
Keywords
  • collective reputation,
  • dynamic game,
  • real options,
  • stochastic quality
Disciplines
Publication Date
2017
Citation Information
Katrin Millock, Fulvio Fontini and Michele Moretto. "Collective Reputation with Stochastic Production and and Unknown Willingness to Pay for Quality" Environmental Economics and Policy Studies (2017)
Available at: http://works.bepress.com/millock/22/