Signal Facilitation: A Policy Response to Asymmetric Information

Thomas E Cooper

The Journal of Business, 1992, vol. 65, issue 3, 431-50

Abstract: In cases of asymmetric information, policymakers sometimes want to make informed agents share their private information. One policy response to this situation is signal facilitation, altering the environment to encourage signaling. This article illustrates signal facilitation in the context of a competitive used-car market. Sellers may determine quality and reveal it through warranties. Signal facilitation compares favorably to a policy of mandatory disclosure because car dealers can refuse to test and signal if the cost is excessive. Also, this policy permits dealers to select less costly, less revealing alternatives that may enhance social welfare. Copyright 1992 by University of Chicago Press.

Date: 1992
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