Reputations in Macroeconomics

New York University, New York NY

Investigators

Abstract

This award fund research that develops new theories about the possible relationship between firms? investment in reputation and macroeconomic outcomes. We have long known that businesses are willing to invest in building strong reputations. A reputable business can charge higher prices, it will have more clients and a higher demand for its products. This study will analyze how investment in reputation responds to aggregate and sectoral shocks, and how it generates business cycles even when shocks are not present. The overall goal is to understand how unexpected new information (so called news shocks) affect investment, prices, output, and consumption when firms care about the reputation of their products and/or services. Because the project has implications for corporate tax policy, besides advancing the progress of science it may also enhance national prosperity. The model takes previous work on firm reputation for unobservable quality and expands it to a general equilibrium setting with aggregate shocks and asset trading. The goal is to offer new explanations of macroeconomic outcomes. News shocks raise output and asset prices. New products are more subject to reputation concerns given that their quality is more uncertain at early stages of development; assuming that the durables sector features a faster flow of new products, this sector is a leading indicator. Idiosyncratic volatility and aggregate volatility move in opposite directions. Multiple equilibria arise because production has a pecuniary external effect that works through the discount factor. Although the model has no direct externalities, some equilibria are cyclical even if there are no shocks.