Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26664
Authors: 
Belleflamme, Paul
Peitz, Martin
Year of Publication: 
2009
Series/Report no.: 
CESifo working paper 2619
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 socially inefficient, low quality products in the market.
Subjects: 
asymmetric information
product quality
JEL: 
D82
D92
L15
Document Type: 
Working Paper

Files in This Item:
File
Size
359.45 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.