Asymmetric information and overinvestment in quality

Paul Belleflamme and Martin Peitz

European Economic Review, 2014, vol. 66, issue C, 127-143

Abstract: In a standard adverse selection world, asymmetric information about product quality leads to quality deterioration in the market. Suppose that a higher investment level makes the realization of high quality more likely. Then, if consumers observe the investment (but not the realization of product quality) before purchase, they can infer the probability distribution of high and low quality that may be put on the market. We uncover two effects that may lead the firm to overinvest in quality compared to a market with full information: first, an adverse selection effect according to which a sufficiently large investment can avoid adverse selection and, second, an efficiency effect according to which a larger investment reduces the probability of having in the market low quality products that are not socially valuable.

Keywords: Asymmetric information; Product quality; Adverse selection (search for similar items in EconPapers)
JEL-codes: D82 D92 L15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0014292113001700
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Asymmetric information and overinvestment in quality (2014)
Working Paper: Asymmetric Information and Overinvestment in Quality (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:66:y:2014:i:c:p:127-143

DOI: 10.1016/j.euroecorev.2013.12.005

Access Statistics for this article

European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().