Asymmetric Information and Overinvestment in Quality

International University in Germany Working Paper No. 49/2007

18 Pages Posted: 20 Feb 2007

See all articles by Paul Belleflamme

Paul Belleflamme

CORE and Louvain School of Management, UCL (Université Catholique de Louvain); CESifo (Center for Economic Studies and Ifo Institute)

Martin Peitz

University of Mannheim - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007

Abstract

According to standard economic wisdom, asymmetric information about product quality leads to a 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. This, as we show, may make the firm overinvest in quality compared to a market with full information.

Keywords: asymmetric information, product quality

JEL Classification: D82, D92, L15

Suggested Citation

Belleflamme, Paul and Peitz, Martin, Asymmetric Information and Overinvestment in Quality (January 2007). International University in Germany Working Paper No. 49/2007. Available at SSRN: https://ssrn.com/abstract=963229 or http://dx.doi.org/10.2139/ssrn.963229

Paul Belleflamme

CORE and Louvain School of Management, UCL (Université Catholique de Louvain) ( email )

34 Voie du Roman Pays
POBox L1.03.01
B-1348 Louvain-la-Neuve, B-1348
Belgium
+32 10 47 82 91 (Phone)
+32 10 47 43 01 (Fax)

HOME PAGE: http://perso.uclouvain.be/paul.belleflamme/Site/Home.html

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Martin Peitz (Contact Author)

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany
+49 621 181-1835 (Phone)

HOME PAGE: http://peitz.vwl.uni-mannheim.de/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
165
Abstract Views
881
rank
99,489
PlumX Metrics