Firm Reputation As The Legacy Of Family

Reputation is a valuable asset for a firm, and it is also a tradable asset in modern economic society. The theory of firm reputation has demonstrated that it is just the reputation's property of being tradable ensure the same incentive of firm owners' whole life, avoiding the moral hazard towards the end of one's career. In reality, there are several ways for the exit of firm owners, not only through the market of firms, but also can through the form of family legacy. In this form, firm reputation as an important component of firm's invisible asset is passed down to owners' children or their relatives at the same time. This paper's aim is just to investigate the problem of firm owner's reputation incentive of this form.Based on the observation of interrelated theory of firm reputation, the paper established an overlapping-generations model containing adverse selection and moral hazard, and using this model to investigate the reputation problem of firm owners when reputation as the legacy of family. First, the paper investigates the reputation incentive problem in a two-period economy, and draws a conclusion that the mechanism of reputation as the family legacy can ensure the same incentive of firm owners' whole life just like the reputation market's function. The paper then investigates the situation in an infinite horizon, and obtains the same result like in the two-period economy. Further more, the paper analyses the model's empirical evidence based on the succession characters of family firms in our country, and investigates a case when the value of reputation is not completely obtained in the reputation market. In this case, the paper draws a conclusion that the firm owner will pass the firm's reputation down to his (her) children for higher reputation income rather than sell it through reputation market, and if the firm owner has not proper successor, he (she) will reduce the effort level to maintain reputation in the end of the career. In the last, the main conclusions are summarized and the prospects of future research are suggested.