Hidden Talents: Entrepreneurship and Pareto‐Improving Private Information

Andrew Daughety and Jennifer Reinganum ()

Journal of Economics & Management Strategy, 2009, vol. 18, issue 3, 901-934

Abstract: Two entrepreneurs, each privately informed about her own talent, simultaneously and noncooperatively choose their efforts in producing a new product. Product quality depends on both entrepreneurs’ talents and efforts, but is unobservable by potential buyers prior to purchase; however, buyers can observe the entrepreneurs’ individual efforts. Because the entrepreneurs share the payoff, each is tempted to shirk. However, the need to signal quality to potential buyers serves as a credible commitment to provide greater effort. Thus, the “problem” of adverse selection mitigates the problem of moral hazard, so that a new venture can perform better than the corresponding mature market.

Date: 2009
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https://doi.org/10.1111/j.1530-9134.2009.00233.x

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Chapter: Hidden Talents: Entrepreneurship and Pareto-Improving Private Information (2007)
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