Reputation Leaders, Quality Laggards: Incentive Structure in Markets with Both Private and Collective Reputations

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A theoretical model is developed to illustrate the economic incentives to invest in quality in markets with a dual reputation structure: private (firm reputation) and collective (regional reputation). Numerical dynamic programming techniques are then used to simulate firms’ strategic behaviour, and competitive outcomes are compared to the optimal investment of a regional planner. Market and product characteristics inducing asymmetric and/or sub‐optimal investment strategies, potentially destabilising for the region, are investigated.