The Good, the Bad and the Complex: Product Design with Imperfect Information

53 Pages Posted: 12 Dec 2018 Last revised: 6 Nov 2019

See all articles by Vladimir Asriyan

Vladimir Asriyan

CREI; Barcelona GSE; Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR)

Dana Foarta

Stanford Graduate School of Business

Victoria Vanasco

CREi ; Barcelona GSE; CEPR

Date Written: November 4, 2019

Abstract

This paper explores the incentives of product designers to complexify products, and the resulting implications for overall product quality. In our model, a consumer can accept or reject a product proposed by a designer, who can affect the quality and the complexity of the product. While the product’s quality determines the direct benefits of the product to the consumer, the product’s complexity affects how costly it is for this Bayesian consumer to extract information about the product’s quality. Examples include banks that design financial products that they later offer to retail investors, or policymakers who propose policies for approval by voters. We find that complexity is not necessarily a feature of low quality products. While an increase in alignment between the consumer and the designer leads to more complex but better quality products, higher product demand or lower competition among designers leads to more complex and lower quality products. Our findings produce novel empirical implications on the relationship between quality and complexity of financial products and regulatory policies, which are consistent with recent evidence.

Keywords: product design; information frictions; information transmission; signaling; complexity; regulation; financial products

JEL Classification: D82, D83, G18, P16, D78

Suggested Citation

Asriyan, Vladimir and Foarta, Dana and Vanasco, Victoria, The Good, the Bad and the Complex: Product Design with Imperfect Information (November 4, 2019). Stanford University Graduate School of Business Research Paper No. 19-6. Available at SSRN: https://ssrn.com/abstract=3287963 or http://dx.doi.org/10.2139/ssrn.3287963

Vladimir Asriyan (Contact Author)

CREI ( email )

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Barcelona GSE ( email )

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HOME PAGE: http://www.barcelonagse.eu/Faculty.php?id=510

Universitat Pompeu Fabra ( email )

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Spain

HOME PAGE: http://www.econ.upf.edu/en/people/onefaculty.php?id=p7040

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Dana Foarta

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Victoria Vanasco

CREi ( email )

RAMON TRIAS FARGAS 25-27
Barcelona, 08005
Spain
+34935422598 (Phone)

HOME PAGE: http://https://sites.google.com/site/vicovanasco

Barcelona GSE ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

CEPR ( email )

London
United Kingdom

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