Who wants a good reputation? (vol 68, pg 415, 2001)

We examine a market in which long-lived firms face a short-term incentive t o exert low effort, but could earn higher profits if it were possible to co mmit to high effort. There are two types of firms, "inept" firms who can on ly exert low effort, and "competent" firms who have a choice between high a nd low effort. There is occasional exit, and competent and inept potential entrants compete for the right to inherit the departing firm's reputation. Consumers receive noisy signals of effort choice, and so competent firms ch oose high effort in an attempt to distinguish themselves from inept firms. A competent firm is most likely to enter the market by purchasing an averag e reputation, in the hopes of building it into a good reputation, than eith er a very low reputation or a very high reputation. Inept firms, in contras t, find it more profitable to either buy high reputations and deplete them or buy low reputations.