Abstract
In a two-sided asymmetric information market, the role of the accuracy of consumers’ imperfect and private information on the level of fraud, incidence of fraud and trade under price rigidity is examined. Consumers receive a costless but noisy private signal of quality. The product offered in the market can be of two exogenously given qualities and it is common knowledge that the consumer is not willing to pay a high price for a low quality product. A low quality seller chooses to be either honest (by charging the lower market price) or dishonest (by charging the higher price). We show that equilibria involving fraud exist for all parameter values. Furthermore, for some parameter values, we find that -in equilibrium- a higher precision of consumers’ private information leads to higher levels of fraud and incidence of fraud, reducing consumers’ welfare. We provide conditions for the public revelation of consumers’ private information to be a Pareto improvement.
Highlights
The market is the place set apart where men may deceive one another.Anacharsis, 600 B.C.Consumer fraud, a consequence of consumers’ incomplete information, is ubiquitous.As an illustration, “seafood fraud” is frequent in the international seafood industry: less desirable, cheaper or more readily available fish are often mislabelled as more desirable species for financial gain
For intermediate signal precision values, private information provision policies have no effect on the precision of the public information released strategically by the seller in equilibrium but they lead socially to both a Pareto improvement in ex-ante terms and less fraud committed in the market if and only if the prior probability for high quality products is relatively high
The critical difference between both settings is that the fraction of uninformed consumers is exogenously fixed, it does not depend on the state, under the extreme information structure whereas the fraction of consumers who receive a favourable signal depends on the state and it is positively correlated with value of the prior belief in the original model
Summary
The market is the place set apart where men may deceive one another. Anacharsis, 600 B.C. A priori, the more descriptive or detailed the agencies’ warnings are, the higher the consumers’ ability to identify potential frauds is This ability can be interpreted as the precision of a private noisy signal observed by consumers about the quality of the offered product. The market informational asymmetries create incentives for opportunistic behaviour by a seller with a low quality good could attempt to defraud the buyer by charging the high price. His probability of success in deceiving the buyer is dependent on the consumer’s ability to detect an attempt of fraud.
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