The Effect of Asymmetric Information on Product Market Outcomes

The incentives that arise in markets with asymmetric information are illustrated in the classroom exercise presented here. Student sellers choose both a quality ‘grade’ and a price for their products. Initially, both prices and grades for all sellers are posted, and buyers select from these offerings. In this full-information setup, the market prices and grades quickly reach efficient levels that maximize total surplus. Next, although sellers continue to choose grades and prices, only prices (not grades) are posted for buyers to see when they shop. The grades and prices then fall to inefficiently low levels. The observed market outcomes in this exercise can stimulate useful discussion of asymmetric information, market failure, and remedies such as quality standards and warranties.

Download Full-text

Do photos help or hinder field experiments of discrimination?

International Journal of Manpower ◽

10.1108/ijm-09-2017-0242 ◽

2018 ◽

Vol 39 (4) ◽

pp. 502-518 ◽

Cited By ~ 3

Author(s):

Judith Rich

Keyword(s):

Field Experiments ◽

Response Probability ◽

Product Market ◽

Skin Colour ◽

Product Markets ◽

Market Outcomes ◽

Content Type ◽

Race Ethnicity ◽

The Impact ◽

First Time

Purpose The purpose of this paper is to assess field experiments of labour and product markets that have attached photos to identify applicants (in the case of labour markets) or sellers/crowd funders (in the case of product markets). Design/methodology/approach The experiments seek to identify the contribution of attractiveness, race/ethnicity, skin colour, sexual orientation or religion to the behaviour of agents in markets. These experiments attach photos to CV to signal attractiveness, or the basis of being tested such as race/ethnicity, skin colour or religion. Findings Many experiments report significant findings for the impact of attractiveness or the identity revealed on positive callbacks to applicants. Research limitations/implications The issue considered here, however, is to what extent it is attractiveness or other perceived characteristics that may have had an impact on the behaviour recorded in the experiments. The results of the studies covered in this paper, to a lesser extent those of Weichselbaumer (2004) and Baert (2017), are compromised by including photos, with the possibility the responses received were influenced not only by the basis being tested such as attractiveness, race/ethnicity or religion but by some other characteristic unintended by the researcher but conveyed by the photo. Practical implications There is evidence in the experimental work of a range of characteristics that photos convey of individuals and their impact on labour and product market outcomes such as success in obtaining a positive response to job applications and success in obtaining funding to finance projects in the product market. Suggestions are made for future experiments: evaluation of photos for a range of characteristics; use of a “no photo” application together with the photo applications; and evaluation of responses for any bias from unobservable characteristics using Neumark (2012). Originality/value This paper discusses for the first time three questions with some tentative answers. First, the researcher faces introducing further unobservable characteristics by using photos. Second, the researcher cannot fully control the experimental approach when using photos. Third, the researcher is able to accurately evaluate the impact of the photos used on the response/probability of call back. Field experiments using photos need to ensure they do this for the range of factors that have been shown to affect judgments and therefore potentially influence call back response. However, the issue remains whether the researcher has, in fact, identified all potential characteristics conveyed by the photos.

Download Full-text

Linking Patent Issues to Product Market Outcomes

Academy of Management Proceedings ◽

10.5465/ambpp.2012.13317symposium ◽

2012 ◽

Vol 2012 (1) ◽

pp. 13317 ◽

Cited By ~ 6

Author(s):

Stefan Wagner ◽

Simon D. Wakeman

Keyword(s):

Product Market ◽

Market Outcomes

Download Full-text

Markets and organizations

10.12681/eadd/31711 ◽

2011 ◽

Author(s):

Ευαγγελία Χαλιώτη

Keyword(s):

Asymmetric Information ◽

Learning Process ◽

Market Competition ◽

Product Market ◽

Agency Cost ◽

Career Concerns ◽

Policy Implications ◽

Full Information ◽

Team Members ◽

The Social

This dissertation deals with the design of optimal incentive schemes in the presence of collaborative assignments. The later are considered as either intentional, in the form of teamwork, or unintended, in the form of knowledge spillovers.In the first part, the present study investigates optimal incentive contracts for R&D divisions in the presence of spillovers on R&D-outputs and downstream market competition. It examines the effect of spillovers on cost-reducing R&D incentives and addresses the question of whether the standard result that profits are higher under full information applies in this setting. Spillovers necessitate the use of relative performance evaluation schemes even in the absence of correlation between the random factors in the R&D process. Such compensation schemes can effectively filter out the knowledge externality from employees reward by placing a negative weight (short position) on rival-firm performance. These contracts introduce competition between agents and promote efficiency in designing incentives for risk-averse employees.The analysis is performed in a framework where the feedback mechanism in the R&D process is positive and self-reinforced as happens mainly in science-based industries and technological parks. Empirical evidence reveals that technical advance in knowledge-driven industries go hand in hand with feedback mechanisms which display increasing returns to spillovers. Given such technological interactions, product market rivals exert higher efforts as spillovers increase. In particular, each rival seeks to realize a slightly lower marginal costs from its competitor so as to extent its businesses vis-à-vis the market. Given that all have the same incentives and research has a greater impact on innovators’ profits, firms enter into a rat race. In turn, intensified spillovers speed up the R&D activity. The agency problem gets also increased implying that there are far more distortions in incentives.This study argues that, in highly competitive industries, firms, that are involved in this prisoners dilemma-type of race and are driven by business-stealing incentives, may enjoy higher profits under asymmetric information. It is so because, in a full-information world, rivals exert a fairly high level of R&D-efforts burning up their profits. Higher risk and uncertainty about individual production induce the employers to moderate such incentives and their appetite for innovation. Cost-savings by exerting lower efforts due to risk-sharing may yield higher profits for rivals. In a sense, principals are better-o¤ as the incentive-insurance trade-o¤ is shifted towards the later. This is a simple reason why one might derive a positive relationship between insurance and net profits which counters the prediction of the principal-agent theory. This result indicates firms’ incentives to engage in collusive- like behavior. Delegating the R&D decisions under asymmetric information and thus, committing themselves ex-ante to lower effort can work as a colluding-like device that affects firms responses in the proceeding stages. As a result, firms earn higher profits than under the full information benchmark.For a more complete discussion, this study considers centralized cases where spillovers are internalized. It examines the incentives of individual firms to form a strategic alliance in R&D by agreeing upon collusive wage agreements and the social R&D incentives of the government. This work anticipates the government’s intention to intervene in the R&D market in order to affect competition in the product market. Social R&D incentives induce individual firms to innovate more implying that, taking the decisions unilaterally, there are unexploited productive opportunities due to misallocation of resources. More notably, if the R&D process is not too costly, the cost of misallocation that arises in the presence of the moral hazard problem exceeds the agency cost R&D competitors incur. The distortion in private R&D incentives seems to be less severe than the social losses due to allocative inefficiency. Policy implications are discussed.In the second part (Chapter 5), this study extends the career concerns literature by investigating the incentives to built up reputation when an employee’s task outcome depends on her own ability and effort as well as on the quality of the team she belongs to - i.e. the ability and effort of her fellow team members. It addresses the question of how the learning process about a worker’s ability and the intensity of career concerns depend on the degree of teamwork interactions. It also examines how effectively explicit contracts can be used in the presence of teamwork and incentives to help. This study argues that implicit incentives to work and help arise. In this setting, by exerting effort and providing support, an employee is better able to manipulate the market’s assessment about her own ability. Her actions can influence her own and colleague’s outputs and thus, there are more tools available she can use in order to bias the learning process in her favor. Moreover, intensified dependence among team members increases the returns of supplying labor and thus, the intensity of career concerns. If explicit contracts are provided, this study argues that, reputation and sabotage- like incentives arise. The employer’s benefits by using disaggregate performance measures are also demonstrated.

Download Full-text