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Hidden Talents: Entrepreneurship and Pareto-Improving Private Information

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  • Andrew F. Daughety
  • Jennifer F. Reinganum

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." Copyright (c) 2009, The Author(s) Journal Compilation (c) 2009 Wiley Periodicals, Inc..

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 18 (2009)
Issue (Month): 3 (09)
Pages: 901-934

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Handle: RePEc:bla:jemstr:v:18:y:2009:i:3:p:901-934

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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Cited by:
  1. Goldl├╝cke, Susanne & Schmitz, Patrick W, 2011. "Investments as Signals of Outside Options," CEPR Discussion Papers 8366, C.E.P.R. Discussion Papers.

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