Essays on Asymmetric Information

Abstract

My dissertation analyzes the credible communication of seller information to buyers. My first essay, "New and Improved?", considers firms' incentives to introduce new product versions and the corresponding beliefs of consumers about such products' quality when they have no direct information about the product other than it is new. I find that consumers rationally deduce new product versions are on average better and so pay a pricing premium, in turn leading some firms to exploit the new product signal by selling new versions that are only trivially different from their older version or that require inefficiently high upgrade costs. Notwithstanding this, I show that some "new product signaling" can increase welfare by counteracting Arrow's underinvestment problem. The second essay, "Physician Overtreatment and Undertreatment with Partial Delegation", considers strategic communication from doctors selling medical services to patients. We find that communication problems stemming from misaligned incentives lead the patient to being overtreated for some health states and undertreated in others. Stronger financial incentives for doctors lead to more exaggeration and hence more skepticism, thereby leading to even more exaggeration as the doctor tries to persuade the patient to accept treatment. Insurance makes patients worry less about paying for overtreatment, thereby reducing the need for doctors to exaggerate, and making each side better off by reducing miscommunication. We also resolve an open question in the partial delegation literature by showing that the equilibrium we examine is the most informative equilibrium.