Comments on Grossman

Abstract

GROSSMAN'S paper provides some important insights into environments in which asymmetric information and the resultant lemons problem will be overcome by private disclosure about product quality. My comments focus on the first part of the paper, in which Grossman shows that, when disclosures are ex post verifiable, sellers will be led to make truthful statements about product quality. Grossman goes to considerable pains to distinguish his model from the model considered by SpenceI and others. While there are some differences in the manner in which the stories are told, I believe the parallels between the signaling literature and this paper are both considerable and instructive.2 These comments illustrate the parallels and suggest how results in the signaling literature can be used to extend those derived by Grossman. A simple table is useful to outline the elements of signaling models and their corresponding elements in Grossman's work. Table 1 details these comparisons, using the notation of Spence and Riley in their descriptions of signaling models.3 The cost function (element 6) needs further explication. In the signaling model, C (n, y) is the cost associated with issuing a signal y when selling a unit of quality n. Typically, the existence of a signaling equilibrium requires that C,, < 0: the marginal cost of issuing a signal must be less for high-quality sellers than for low-quality sellers. In Grossman's model, there is no well-defined equivalent-sellers are required to tell the truth. However, one can think of his model as having an implicit cost function, with a large penalty