Shape 6 shows the relationship between your reputation and you can means out of RAstep step one a variety of values of your own contending RA2’s profile

5.step 1 Monopolistic RA

Earliest, i take into account the circumstances in which there is certainly only one RA during the the marketplace. To help make RA1 an effective monopolist, we place brand new reputation for RA2 in order to 0.

Figure 3 plots the strategy of the monopolistic RA for parameters ( ? , p_Grams , ? ) = (0.5, 0.7, 0.9). 19 19 Note that, we have chosen this set of parameters ( ? , p_G , ? ) = (0.5, 0.7, 0.9) for the purpose of illustration only, and verified that our results are robust to other parameter specifications, the plot of which are available upon request. In particular, robustness checks of the main results (Section 5.3) are presented in Appendix B. We can clearly see the strategy of RA1 is “u-shaped” in its reputation. Intuitively, the RA’s strategy is determined by the trade-off between current fees and expected future income. When its reputation is very low, the RA’s expected future income is very small compared to current fees, hence it has little incentive to behave honestly. When its reputation increases, the RA’s future income becomes larger while current fees stay the same, the RA tends to lie less. However, when the RA’s reputation is very high, the penalty for lying decreases, and the RA starts to lie more. The reason that the penalty for lying decreases with reputation is that investors attribute project failures to bad luck rather than lax behaviour when they believe that the RA is very likely to be of the honest type.

Moreover, we can see from Figure 4 that the strategy of RA1 is increasing in ? but decreasing in p_G . 20 20 We have also verified that this result holds in the case of competitive RAs, the plots of which are available upon request. The intuition is that, the reputational penalty of lying depends on how the investors update their beliefs. If projects are more likely to be good (higher ? ) or if good projects are more likely to fail (lower p_G ), then a failure is more likely to be attributed to bad luck rather than lying. Anticipating this smaller cost of lying on reputation, the RA would choose to lie more when ? increases or p_G decreases.

5.dos Competitive RA

We now look at the impact of competition on the behaviour of RA by introducing a second how to message someone on swinglifestyle RA (RA2). Figure 5 plots the strategy of RA1 for parameter values ( ? , p_G , ? ) = (0.5, 0.7, 0.9). Figures 6 and 7 show cross sections of this figure, for different values of q₂ and q₁ , respectively.

As we can see, the relationship between the reputation and strategy of RA1 remains “u-shaped” as in the monopolistic case. Moreover, as the reputation of RA2 increases, the reputation at which RA1 has minimum x₁ , that is, is least likely to lie, also increases. This is not surprising as the disciplining effect is greatest when the reputation of the competing RA (RA2) is close to the reputation of RA1. This is because when the RAs’ reputations are close, it is more likely that the market leadership will change, resulting in more disciplined behaviour. Conversely, if the two RAs have very different reputations, the disciplining effect is relatively weaker.

Furthermore, because Shape 7 shows, the methods out of RA1 is actually 1st coming down with or flat during the RA2’s reputation, right after which growing. That it effect of competition is a mix of this new disciplining perception in addition to market-sharing effect. The fresh new disciplining effect try strongest if the one or two RA’s reputations are romantic, and you may weakest if a couple RA’s reputations are much apart, which implies your probability of a difference off business commander is really small. Additionally, the market industry-sharing perception is often growing on the contending RA’s reputation. In the event that reputation for RA2 was reasonable, the market-revealing effect is extremely small as the RA2 is only able to take away a tiny fraction off share of the market. Because the RA2’s profile actually starts to boost, RA1 does lay less just like the disciplining effect reigns over this new market-sharing impression. not, whenever RA2’s reputation surpasses a certain level, the market industry-sharing impression reigns over once the RA2’s profile becomes higher than simply RA1’s. And this, RA1 have a tendency to sit alot more getting higher opinions out-of RA2’s profile, as a result of the popularity of the industry-revealing effect.