CFDP 1627

Collective Reputation, Professional Regulation and Franchising

Author(s): 

Publication Date: September 2007

Pages: 37

Abstract: 

Collective reputation and its associated free-rider problem have been invoked to justify state licensing of professions and to explain the incidence of franchising. We examine the conditions under which it is possible to create a Pareto-improving collective reputation among groups of heterogeneous producers. If the regulator or franchisor cannot credibly commit to high quality then a common reputation can be created only if the groups are not too different and if marginal cost is declining. High cost groups benefit most from forming a common regime.

Keywords: 

Quality regulation, Licensing, Collective reputation, Reputational externality, Franchising

JEL Classification Codes:  L43, L44