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 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.
I thank the National Science Foundation and the C.V. Starr Center for Applied Economics for financial assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.