Asymmetric Information and Overinvestment in Quality

In a standard adverse selection world, asymmetric information about product quality leads to 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. We uncover two effects that may lead the firm to overinvest in quality compared to a market with full information: first, an adverse selection effect according to which a sufficiently large investment can avoid adverse selection and, second, an efficiency effect according to which a larger investment reduces the probability of socially inefficient, low quality products in the market.asymmetric information, product quality

COMPETITIVE INTELLIGENCE

There are many challenges to face in this century. It’s an era of information. Those who have the best information are going to win the race for supremacy on the market. More and more managers are aware of the fact that they have to do something to remain on the market and to be successful. They have to adapt and to try to gain an advantage over the competitors. Nowadays, the only thing that makes the difference is the company’s competitiveness. The times when the one who had the capacity to produce more was the leader are long gone; now all the actors on every market are focused on quality and this leads to severe competition. What is left then? How can a company gain competitive advantage? The only thing that can make a difference is not the quality of the product but the quality of the information they posses about the market, the client, the product, the technological process, management etc. It’s about the information management. It’s about competitive intelligence.competitive intelligence, information, intelligence, strategy

Gatekeeping in Health Care

We study the competitive effects of restricting direct access to secondary care by gatekeeping, focusing on the informational role of general practitioners (GPs). In the secondary care market there are two hospitals choosing quality and specialisation. Patients, who are ex ante uninformed, can consult a GP to receive an (imperfect) diagnosis and obtain information about the secondary care market. We show that hospital competition is amplified by higher GP attendance but dampened by improved diagnosing accuracy. Therefore, compulsory gatekeeping may result in excessive quality competition and too much specialisation, unless the mismatch costs and the diagnosing accuracy are sufficiently high. Second-best price regulation makes direct regulation of GP consultation redundant, but will generally not implement first-best.gatekeeping, imperfect information, quality competition, product differentiation, price regulation

Consumer Uncertainty about which Firm Sells the High Quality: on the Slow Penetration of Some Credence Goods

In this paper, we analyze cases where consumers are aware of the existence of two qualities but do not know which firm sells the good one. We show that if the production of the high quality requires higher cost, its producer may be severly disadvantaged, even if the additional utility fully justifies the extra cost. We even show cases where all consumers beliefs are in favour of the efficient high quality producer, yet it is its inefficient rival that monopolizes the market! This result explains the slow penetration of some credence goods like environementally friendly products, organic vegetables, etc. It also makes an urgent call for labelling this kind of products.Incomplete information, quality, asymetric costs

A Market Based Measure of Credit Quality and Banks' Performance During the Subprime Crisis

We propose a new method for measuring the quality of banks credit portfolios. This method makes use of information impounded in bank share prices by exploiting differences in their sensitivity to credit default swap spreads of borrowers of varying quality. The method allows us to derive a credit risk indicator (CRI), which is the perceived share of high risk exposures in a bank's portfolio. We estimate CRIs for the 150 largest U.S. bank holding companies and find that they have strong predictive power for the BHCs' performance during the subprime crisis, even after controlling for a variety of traditional asset quality proxies. Interestingly, we also find that the BHCs' aggregate CRI did not deteriorate since the beginning of the subprime crisis. This suggests that the market was aware of their (average) exposure to high risk credit.credit risk;asset quality;banks;subprime crisis

A methodology for analysing and evaluating narratives in annual reports: a comprehensive descriptive profile and metrics for disclosure quality attributes

There is a consensus that the business reporting model needs to expand to serve the changing information needs of the market and provide the information required for enhanced corporate transparency and accountability. Worldwide, regulators view narrative disclosures as the key to achieving the desired step-change in the quality of corporate reporting. In recent years, accounting researchers have increasingly focused their efforts on investigating disclosure and it is now recognised that there is an urgent need to develop disclosure metrics to facilitate research into voluntary disclosure and quality [Core, J. E. (2001). A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(3), 441–456]. This paper responds to this call and contributes in two principal ways. First, the paper introduces to the academic literature a comprehensive four-dimensional framework for the holistic content analysis of accounting narratives and presents a computer-assisted methodology for implementing this framework. This procedure provides a rich descriptive profile of a company's narrative disclosures based on the coding of topic and three type attributes. Second, the paper explores the complex concept of quality, and the problematic nature of quality measurement. It makes a preliminary attempt to identify some of the attributes of quality (such as relative amount of disclosure and topic spread), suggests observable proxies for these and offers a tentative summary measure of disclosure quality

Gatekeeping in health care

We study the competitive effects of restricting direct access to secondary care by gatekeeping, focusing on the informational role of general practitioners (GPs). In the secondary care market there are two hospitals choosing quality and specialization. Patients, who are ex ante uninformed, can consult a GP to receive an (imperfect) diagnosis and obtain information about the secondary care market. We show that hospital competition is amplified by higher GP attendance but dampened by improved diagnosing accuracy. Therefore, compulsory gatekeeping may result in excessive quality competition and too much specialization, unless the mismatch costs and the diagnosing accuracy are sufficiently high. Second-best price regulation makes direct regulation of GP consultation redundant, but will generally not implement first-best

Imperfect Certification

This paper proposes a model for a certification market with an imperfect testing technology. Such a technology only assures that whenever two products are tested the higher quality product is more likely to pass than the lower quality one.When only one certifier with such testing technology is present in the market, it is found that this monopoly certifier can be completely ignored in equilibrium, in contrast to the prediction of a model with perfect testing technology. A separating equilibrium is also supported in which only relatively high quality types (products) choose to pay for the certification service. It is true that in such an equilibrium having a certificate is better than not. The exact value of a certificate, however, depends both on the prior distribution of product quality and the nature of the testing technology.Welfare accounting shows that the monopolistic certifier’s profit maximizing conduct can lead to under or over supply of certification service depending on model specification. Optimal certification fee is always positive and such that it makes all positive types choose to test. In the case of two competing certifiers with identical testing technologies, the intuition of Bertrand competition does not necessarily hold. Segmentation equilibrium in which higher seller types choose the more expensive certification service and not so high types choose the less expensive service can be supported. As an application, we argue that the fee differentiation between major and non-major auditing firms need not be a result of any differences in their auditing technologies.Asymmetric information, imperfect certification

Bank debt and market debt: an empirical analysis for Spanish firms

This paper examines the effect on the firm's banking cost of the issue of debt securities. We argue over the existence of a positive relationship between the issue of market debt and the reduction of firm's banking cost. This idea relies on three main arguments: i) Banks can delegate to investors the supervision task, a feature that makes bank supervision less costly. ii) The issue of public debt increases firms' bargaining power in front of the banks, as the former can get funds through non-bank financing ch annels. iii) Banks with no prior information on the issuing firm may interpret the issue of debt securities as a positive signal of firm's quality. Additionally, we argue that the previous effects are less important for non-first issues and are sensible to the maturity of the bond issued. We empirically test these and other related theoretical results making use of a database of Spanish non-financial firms during the 1993-1998 period. We find empirical support for our theoretical contentions

Improving housing quality as markefing strategy

Prospective housing clients in Portugal face up a marked lack of information on the characteristics of housing products, which most often turn out to be very different of their expectations. This lack of information does not allow them to relate adequately quality and cost. Furthermore, housing products are not adequately differentiated owing to an inefficient approach to the market from the part of different actors in the property sector, which makes difficult the understanding of the true needs and wishes of the client. Nowadays, in a highly competitive housing market, it is increasingly needed to weigh the quality of supply, for housing investment is one of the most important decisions of the Portuguese households. Due to the fact that competition on that market is almost exclusively based on price, there is a need for change in the culture of the housing sector that would promote adequate strategies of marketing and quality. This research project has as the main aim to develop a support tool for the construction enterprises in the housing sector in order to improve the value of their products/services and, to a certain extent, the competitiveness of the sector. The model, which is specifically developed for the town of Bragança, is based on information collected from users in newly occupied housing. It was done through the use of a questionnaire- survey conducted on respondents from fourteen multi-family housing, which were built by four contractors/developers