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

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: Complexity, financial products, Information Acquisition, Information Frictions, Product design, regulation, signaling

JEL Classification: D78, D82, D83, G13