In many cases, consumers cannot observe a single firm’s investment in
environmental quality or safety, but only the average quality of the industry. The
outcome of the investment is stochastic, since firms cannot control perfectly the
technology or external factors that may affect production. In addition, firms do not
know consumers’ valuation of quality. We characterize the solution of the firms’
investment game and show that the value of stopping investments when firms are
already investing in quality can be negative when the free-riding incentives dominate.
The existence of systematic uncertainty on the outcome of investment slows
down investment in quality, compared to a situation without uncertainty. The
uncertainty on consumers’ willingness to pay for quality can speed up or slow down
investment. We also obtain the counterintuitive result that information acquisition
may decrease the overall level of quality.

• Collective reputation with stochastic production and unknown willingness to pay for quality