Information and consumer fraud in a signalling model

Date: 2014-01
By: Silvia Martínez-Gorricho (Dpto. Análisis Económico Aplicado)
This article considers a two-sided private information model. We assume that two exogenously given qualities are offered in a monopolistic market. Prices are fixed. A low quality seller chooses to be either honest (by charging the lower market price) or dishonest (by charging the higher price). We discuss the signaling role of the consumer’s private information on the equilibrium level of dishonesty, incidence of fraud and trade. We demonstrate that the equilibrium incidence of fraud is nonmonotonic in the buyer’s private information when the prior belief favors the low-quality seller strongly enough. This result holds as long as information is noisy and regardless of its private or public nature. Welfare consequences are ambiguous.
Keywords: Consumer Fraud; Asymmetric Information; Price Signalling
JEL: D42 D82 G14 L15 L51

Hidden Information, Bargaining Power, And Efficiency: An Experiment

Hidden Information, Bargaining Power, And Efficiency: An Experiment


Date: 2011
By: Antonio Cabrales (Departamento de Economía – Universidad Carlos III de Madrid)
Gary Charness (Department of Economics, University of California – University of California, Santa Barbara)
Marie-Claire Villeval (GATE Lyon Saint-Etienne – Groupe d’analyse et de théorie économique – CNRS : UMR5824 – Université Lumière – Lyon II – École Normale Supérieure de Lyon)
We devise an experiment to explore the effect of different degrees of bargaining power on the design and the selection of contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how different ratios of principals and agents affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies may disappear, but they are insensitive to the number of principals. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.
Keywords: experiment; hidden information; bargaining power; competition; efficiency