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.
"Product Recalls and Firm Reputation."
American Economic Journal: Microeconomics,
Firm Behavior: Empirical Analysis
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Business Taxes and Subsidies including sales and value-added (VAT)
Firm Performance: Size, Diversification, and Scope
Automobiles; Other Transportation Equipment; Related Parts and Equipment