Reputation and Partnerships

This paper studies …rms’decisions to form partnerships to develop new projects and the reputation implications of such decisions. Speci…cally, we analyze how …rms’qualities, initial reputations and participation levels a¤ect the evolution of …rms’reputations and incentives to form partnerships. We consider both the case where participation levels are exogenous and that where they are endogenous. There are equilibria in which only …rms with good qualities form a partnership, and equilibria in which only …rms with bad qualities do so. When participation levels are exogenous, qualities are substitutes, i.e., …rms with higher qualities require lower qualities from potential partners to form partnerships. In contrast, when participation levels are endogenous, there are equilibria where qualities are complements, i.e., …rms with higher qualities demand higher-quality partners. In particular, we identify situations where for low quality levels qualities are substitutes, while for high quality levels they are complements. Part of this paper was written when the second author was visiting the University of Southern California. We would like to thank Juan Carrillo, Adeline Delavande, Iliyan Georgiev and Jon Levin for helpful comments and suggestions.