Campaign Tactics

Abstract

This chapter models the interaction between a firm and activist using an infinite-horizon dynamic stochastic game. The firm enhances its reputation through private regulation, but the firm has an incentive to coast on its reputation by private regulation as its reputation grows. The activist can harm the firm’s reputation through criticism, which impairs the firm’s reputation on the margin, and confrontation, which can trigger a crisis that can severely damage the firm’s reputation. Criticism and confrontational activity are shown to be imperfect substitutes. The more patient the activist, or the more passionate about externality reduction, the more likely the activist is to rely on confrontation. The more patient the firm, the more likely that it will be targeted by an activist that relies on confrontation. The chapter also explores whether the activist might reward the firm with praise.