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Incentives for Cost-Reducing Investment in a Signalling Model of Product Quality

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  • Shiou Shieh

Abstract

Often, consumers do not observe a firm's cost-reducing investment decision. The investment incentive can be weakened when product quality is unobservable before purchase because consumers do not know whether a lower price arises from lower costs or lower quality. This articles examines this issue in a signalling model with both hidden information (about quality) and hidden action (about investment). Surprisingly, asymmetric information about quality may strengthen or weaken a firm's incentive to adopt a process innovation, depending on whether low-price or high-price signalling is used.

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  • Shiou Shieh, 1993. "Incentives for Cost-Reducing Investment in a Signalling Model of Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 466-477, Autumn.
  • Handle: RePEc:rje:randje:v:24:y:1993:i:autumn:p:466-477
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    References listed on IDEAS

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    1. Carolyn Pitchik & Andrew Schotter, 1993. "Information Transmission in Regulated Markets," Canadian Journal of Economics, Canadian Economics Association, vol. 26(4), pages 815-829, November.
    2. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    3. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    5. Pitchik, Carolyn & Schotter, Andrew, 1987. "Honesty in a Model of Strategic Information Transmission," American Economic Review, American Economic Association, vol. 77(5), pages 1032-1036, December.
    6. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 647-658.
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    Citations

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    Cited by:

    1. Daughety, Andrew & Reinganum, Jennifer, 1992. "Product Safety: Liability, R & D and Signaling," Working Papers 94-17, University of Iowa, Department of Economics, revised 1994.
    2. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, vol. 85(5), pages 1187-1206, December.
    3. Sengupta, Aditi, 2015. "Competitive investment in clean technology and uninformed green consumers," Journal of Environmental Economics and Management, Elsevier, pages 125-141.
    4. Jackson, William III & Nandakumar, Purushottaman & Roth, Aleda V., 2003. "Market structure, consumer banking, and optimal level of service quality," Review of Financial Economics, Elsevier, vol. 12(1), pages 49-63.
    5. Sengupta, Aditi, 2012. "Investment in cleaner technology and signaling distortions in a market with green consumers," Journal of Environmental Economics and Management, Elsevier, pages 468-480.
    6. Belleflamme, Paul & Peitz, Martin, 2014. "Asymmetric information and overinvestment in quality," European Economic Review, Elsevier, vol. 66(C), pages 127-143.
    7. Takaoka, Sumiko, 2005. "The effects of product liability costs on R&D with asymmetric information," Japan and the World Economy, Elsevier, vol. 17(1), pages 59-81, January.
    8. Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Products Liability, Signaling and Disclosure," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(1), pages 106-126, March.
    9. Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Communicating quality: a unified model of disclosure and signalling," RAND Journal of Economics, RAND Corporation, pages 973-989.

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