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Hidden Talents: Entrepreneurship and Pareto‐Improving Private Information
Author(s) -
Daughety Andrew F.,
Reinganum Jennifer F.
Publication year - 2009
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2009.00233.x
Subject(s) - unobservable , adverse selection , moral hazard , entrepreneurship , quality (philosophy) , product (mathematics) , business , stochastic game , pareto principle , microeconomics , private information retrieval , industrial organization , information asymmetry , marketing , economics , finance , computer science , operations management , incentive , computer security , philosophy , geometry , mathematics , epistemology , econometrics
Two entrepreneurs, each privately informed about her own talent, simultaneously and noncooperatively choose their efforts in producing a new product. Product quality depends on both entrepreneurs’ talents and efforts, but is unobservable by potential buyers prior to purchase; however, buyers can observe the entrepreneurs’ individual efforts. Because the entrepreneurs share the payoff, each is tempted to shirk. However, the need to signal quality to potential buyers serves as a credible commitment to provide greater effort. Thus, the “problem” of adverse selection mitigates the problem of moral hazard, so that a new venture can perform better than the corresponding mature market.