Keywords: Competition, information aggregation, incentives
Abstract: One of the most basic principles in economics is that competitive
pressure promotes efficiency. However, this pressure can also have a
dark side because it makes firms reluctant to act on private
information that is unpopular with consumers. As a result, firms that
possess superior information about the consequences of their actions
for consumers' welfare may choose not to use it. We develop this idea
in a simple model of delegated investment in which agents are fully
rational and risk neutral, and agency problems are absent. We show
that competitive pressure obliges firms to make inefficient decisions
when their information advantage over consumers is relatively small.
This result could be applied to a broad range of economically
Full paper (1112 KB PDF)
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Last update: September 30, 2002