Collective Reputation in Trade: Evidence from the Chinese Dairy Industry

Abstract

Collective reputation implies an important externality. Among firms trading internationally, quality shocks about one firm's products could affect the demand of other firms from the same origin country. We study this issue in the context of a large-scale scandal that affected the Chinese dairy industry in 2008. Leveraging rich firm-product level administrative data and official quality inspection reports, we find that the export revenue of contaminated firms dropped by 84% after the scandal, relative to the national industrial trend, and the spillover effect on noncontaminated firms is measured at 64% of the direct effect. Notably, firms deemed innocent by government inspections did not fare any better than noninspected firms. These findings highlight the importance of collective reputation in international trade and the challenges governments might face in signaling quality and restoring trust. Finally, we investigate potential mechanisms that could mediate the strength of the reputation spillover. We find that the spillover effects are smaller in destinations where people have better information about parties involved in the scandal. New firms are more vulnerable to the collective reputation damage than established firms. Supply chain structure matters especially in settings where firms are less vertically integrated and exhibit fragmented upstream-downstream relationships.

Firms and Collective Reputation: a Study of the Volkswagen Emissions Scandal

“…5 In addition to this literature on individual reputation, Nosko and Tadelis (2015) study how the quality of a transaction between a seller and a buyer on eBay affects the buyer's probability to use the eBay platform again. Our paper also relates to other work studying the reputational effects of industrial scandals, such as Jonsson et al (2009) for the Swedish finance industry, Freedman et al (2012) for the U.S. toy industry, and Bai et al (2018) for the Chinese dairy industry. 6 Additionally, there is a small but growing literature that studies the economic conse-5 There is also a finance literature that studies how a variety of corporate events adversely affect firm enterprise values and interprets such effects as reputational losses; see, for example, Fiordelisi et al (2014) for a summary of this literature.…”

Firms and Collective Reputation: A Study of the Volkswagen Emissions Scandal

“…5 In addition to this literature on individual reputation, Nosko and Tadelis (2015) study how the quality of a transaction between a seller and a buyer on eBay affects the buyer's probability to use the eBay platform again. Our paper also relates to other work studying the reputational effects of industrial scandals, such as Jonsson et al (2009) for the Swedish finance industry, Freedman et al (2012) for the U.S. toy industry, and Bai et al (2018) for the Chinese dairy industry. 6 Additionally, there is a small but growing literature that studies the economic conse-quences of the Volkswagen emissions scandal.…”

Reputation Building under Observational Learning

“…In games where player 1 has three or more actions, Theorem 4 extends when players' stage-game payoffs are monotone-supermodular and the distribution of private signal satisfies a monotone likelihood ratio property (or MLRP), which means that the likelihood ratio between a high signal realization and a low signal realization increases when player 1 takes a higher action. 5 Theorem 4 is reminiscent of a result in Smith and Sørensen (2000), that myopic agents' actions asymptotically match the state if and only if their private signals are unboundedly informative. However, their result does not imply that player 1 can secure a high payoff for two reasons.…”