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Asymmetric information and overinvestment in quality

Author

Listed:
  • BELLEFLAMME, Paul
  • PEITZ, Martin

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • BELLEFLAMME, Paul & PEITZ, Martin, 2014. "Asymmetric information and overinvestment in quality," LIDAM Reprints CORE 2546, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:2546
    Note: In : European Economic Review, 66, 127-143, 2014
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    Cited by:

    1. Ching-Yu Chen & Jwu-Rong Lin & Chun-Ju Liu, 2018. "The Impact of Operational Digitalization and Intangible Asset Investment on Technical Efficiency and Financial Performance of Taiwa's Social Work Industry," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 14(2), pages 147-171, August.
    2. Bolatto, Stefano & Pignataro, Giuseppe, 2023. "Entering the supplier base through certified management standards," International Economics, Elsevier, vol. 174(C), pages 4-17.
    3. Born, Alexander & Kovachka, Nikoleta & Lessmann, Stefan & Seow, Hsin-Vonn, 2018. "Price Management in the Used-Car Market: An Evaluation of Survival Analysis," IRTG 1792 Discussion Papers 2018-065, Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series".
    4. Blijlevens, Janneke & Chuah, Swee-Hoon & Neelim, Ananta & Prasch, Johanna E. & Skali, Ahmed, 2024. "Not all about the money: Service quality information improves consumer decision-making," Journal of Economic Behavior & Organization, Elsevier, vol. 228(C).
    5. Anthony Creane & Thomas D. Jeitschko, 2016. "Endogenous Entry in Markets with Unobserved Quality," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 494-519, September.
    6. Ghulam Hussain Khan Zaigham & Xiangning Wang & Haji Suleman Ali, 2019. "Causal Relation Between Stock Market Performance and Firm Investment in China: Mediating Role of Information Asymmetry," SAGE Open, , vol. 9(4), pages 21582440198, October.
    7. Johan Willner & Sonja Grönblom, 2021. "Quality provision under conditions of oligopoly," Journal of Economics, Springer, vol. 132(2), pages 103-131, March.
    8. Jwu-Rong Lin & Ching-Yu Chen & Tso-Kwei Peng, 2017. "Study of the Relevance of the Quality of Care, Operating Efficiency and Inefficient Quality Competition of Senior Care Facilities," IJERPH, MDPI, vol. 14(9), pages 1-18, September.
    9. He Li & Erbao Cao, 2023. "Competitive crowdfunding under asymmetric quality information," Annals of Operations Research, Springer, vol. 329(1), pages 657-688, October.
    10. Jay Pil Choi & Arijit Mukherjee, 2020. "Optimal certification policy, entry, and investment in the presence of public signals," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 989-1013, December.
    11. Krzysztof Piotr Pawłowski & Wawrzyniec Czubak & Jagoda Zmyślona, 2021. "Regional Diversity of Technical Efficiency in Agriculture as a Results of an Overinvestment: A Case Study from Poland," Energies, MDPI, vol. 14(11), pages 1-20, June.
    12. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107069978, January.
    13. Charlotte Emlinger & Karine Latouche, 2021. "When Quality Management Helps Agri-food Firms to Export," Post-Print hal-03518705, HAL.
    14. Cui, Xue & Shibata, Takashi, 2017. "Investment strategies, reversibility, and asymmetric information," European Journal of Operational Research, Elsevier, vol. 263(3), pages 1109-1122.
    15. Alexakis, Christos & Gogas, Periklis & Petrella, Giovanni & Polemis, Michael & Salvadè, Federica, 2025. "Investigating the investment readiness of European SMEs: A machine learning approach," International Review of Financial Analysis, Elsevier, vol. 105(C).
    16. Yoshimoto, Hisayuki & Zapechelnyuk, Andriy, 2024. "Are there “Ratatouille” restaurants? On anticorrelation of food quality and hygiene," The Quarterly Review of Economics and Finance, Elsevier, vol. 98(C).

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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