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Quality choice, signalling, and moral hazard

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  • Hannu Salonen

    (University of Turku)

Abstract

In this paper it is argued that prices should not reveal the quality of the good to the consumers, when there is asymmetric information about quality between the firm and the consumers, and the firm can affect the quality of its product. Instead, prices should be completely uninformative, so that firms are able to make larger investments to improve the quality, and increase the expected utility of the consumers.

Suggested Citation

  • Hannu Salonen, 1990. "Quality choice, signalling, and moral hazard," Finnish Economic Papers, Finnish Economic Association, vol. 3(2), pages 166-171, Autumn.
    • Handle: RePEc:fep:journl:v:3:y:1990:i:2:p:166-171
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    File URL: http://taloustieteellinenyhdistys.fi/images/stories/fep/f1990_2h.pdf
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    References listed on IDEAS

    as
    1. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
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    Cited by:

    1. Mikko Mustonen, 2005. "Signalling cost with investment in compatibility," Netnomics, Springer, vol. 7(1), pages 39-57, April.

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