Big Names, Bigger Barriers: Firm Reputation and its Role as a Barrier to Entry

Abstract

We investigate the potential for barriers to entry for new firms and an implicit tuition in worker wages stemming from incumbent reputation. To do so, we introduce two models of worker preferences within a framework of matching with externalities and transferable utility based on the work of Kelso and Crawford (1982) and Pycia and Yenmez (2017). Our first preference model allows workers to value the opinions of others by incorporating these opinions into their utility functions. We then build a new fixed point algorithm which increases the efficiency of finding equilibria in this context. Our second preference model introduces explicit preferences for reputation and prestige among workers. We then show that when workers make employment decisions based on firm prestige, we expect to see more concentrated markets and barriers to entry for new firms. Stylized facts from a unique dataset on hiring in large law firms present preliminary empirical evidence supporting the model, indicating that workers in a low-entry industry do have a preference for reputation and prestige in their employers.