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working paper
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r
of economics
Voluntary- Disclosure:
Robustness of the Unraveling Result,
and Comments on Its Importance
Joseph Farrell
Number 374
May 1985
massachusetts
institute of
technology
50 memorial drive
Cambridge, mass. 02139
Voluntary Disclosure:
Robustness of the Unraveling Result,
and Comments on Its Importance
Joseph Farrell
Number 374
May 1985
TN 84-407.1
Voluntary Disclosure:
Robustness of the Unraveling Result,
and Comments on Its Importance*
by
Joseph Farrell
November 1984
Telecommunications Research Laboratory
GTE LABORATORIES INCORPORATED
40 Sylvan Road
Waltham, Massachusetts 02254
*To be published in the Proceedings of the U. C. Santa Cruz Conference
on Regulation and Antitrust, R. Grieson, editor, Lexington Books 1985.
TN 34-407.1
1
1.
INTRODUCTION
Used car dealers have alv/ays had
the Federal Trade Commission
In 1976,
in their cars.
poor reputation for revealing faults
a
(FTC) proposed a strong
rule requiring inspection by dealers of each of 52 systems or components, and
revelation of the results, together with estimated repair cost, and other disclosures.
The National Automobile
was
rule
Dealers Association (NADA)
citing
unreasonable,
estimates
about ten times what the FTC believed.
May 1980 the FTC tentatively proposed
would not be required,
buyers.
of
claimed that such
inspection cost
of
$200,
NADA's protests were effective, and in
a
different rule, under which inspection
but defects known to the dealer must be disclosed to
Having apparently defeated the compulsory-inspection rule,
the National Independent Automobile Dealers Association (NIADA)
new rule,
about
a
NADA and
turned on the
claiming that difficulties in knowing what a dealer had known would
make this rule tantamount to the previous proposal.
However,
in August
1981
the FTC adopted the second rule.
The
rule
did not immediately
decreed that FTC rules
take effect,
because in 1980
should be subject to veto by both houses of Congress
(acting together) within an uninterrupted 90 day period.
FTC Improvement
Congressional
Congress had
(This was called the
Because the Act required an uninterrupted 90
Act.)
extended the
recess
review period
until May
1982,
when
houses of Congress voted to veto the "known-defects" disclosure rule.
dentally,
the
rule was
the first to come before Congress under the
days,
a
both
(Inci-
1980 Act.)
Thus the rule seemed dead, especially after a move to attach a revised version
of its provisions to
a
FTC funding bill was defeated in committee three months
later.
However, the courts had been active meanv;hile in the area of legislative
vetoes.
ruled
a
In January 1982
"one-house veto"
unconstitutional, in
a
the U. S.
Circuit Court of Appeals in Viashington had
(either house of Congress could veto agency actions)
case involving the Federal Energy Regulatory Commission
rM
34-407.1
2
the same court extended that finding to tv7o-house vetoes,
In October,
(FERC).
provision of
the veto
and in particular
the
FTC Improvement Act,
1980
case brought by Consumers Union and Public Citizen against Congress.
of 1983,
the
Supreme Court upheld these
on the grounds
rulings,
in
a
In July
that vetoes
violate the constitutional provision that everything must be presented to the
President before becoming law:
somewhat illogical argument,
since the agen-
rulings themselves are not normally presented to the President.
cies'
Thus
the
a
the known-defect
rule
appeared to have been reinstated.
FTC then decided to take another look at the rule,
However,
and in July 1984 the
five-member Commission voted 3-2 to abolish it, citing difficulty of enforceSo ended
ment.
tortuous history of one of the FTC's most controversial
the
rules
In this paper,
efficiency?
A
we
How much difference does this make
ask:
conclusion
tentative
rather little difference.
surprising
-
to
me
-
is
to
that
it
The reader can judge whether or not this
noticeably supported by the analysis below, which
is
the
result
economic
makes
view is
of thinking
about disclosure in general rather than the result of trying to analyze this
case in particular.
The
principal existing
model
dently) to Grossman (1981) and Hilgrom (1981).
tion 2.
disclosure
of voluntary
is
due
(indepen-
It is summarized below in Sec-
The "unraveling result" claims that voluntary disclosure will lead to
the same results as compulsory disclosure,
and therefore it makes no real dif-
ference whether disclosure is required or not.
Plainly,
for the passion brought
something is missing in that model,
to
bear in the 1980-1982 lobbying battle testifies that, whatever the results may
be,
made
it
does matter.
by Grossman
A
natural candidate
and Hilgrom
that
fully informed about their products.
a
model in Farrell and Sobel (1983)
sellers informed.
Although
\-ie
it
is
for modification is
common
knowledge
In section 3,
to
I
the
that
assumption
sellers
are
use a simplification of
examine the effects of having not all
reproduce the continuity result of Farrell and
TN 34-407.1
3
we also
Sobel,
sense
I
see
in
this version
that continuity
may be misleading,
in
a
discuss.
In Section 4,
requirements will
actually
increase
In Section
the
5,
models
I
try
just
to
evaluate
amount
I
the
of
information acquired and
allocative gains
discussed lack welfare
there clearly are such benefits.
examples,
the
The result is ambiguous.
disclosed.
Although
use the Farrell-Sobel model to examine whether disclosure
I
benefits
from information.
from
information,
However, by considering reasonable numerical
show that the benefits of simple allocative efficiency may be sur-
prisingly small.
IN 34-407
.
4
THE BASIC MODEL: A BASIS FOR DEPARTURE.
2.
For
completeness,
and
to
introduce
notation,
will
I
now
describe
the
model discussed by Grossman and Milgrom.
Each of
a
large number of sellers has available for sale one item, which
known to the seller but not to buyers.
concerning
lies are assumed to be
impossible,
Buyers are concerned with expected value, and compete
or adequately deterred.
to buy,
The seller may make any true statement
and buyers will believe it:
q,
is initially
Its value to each of many buyers, q,
not value himself.
he does
that the price of an item certified to be of quality q will be q,
so
while the price of an incompletely certified item will be the expectation of
In
q.
forming expectations, buyers know the prior
which is represented by
q,
F(»)
on
[0,
a
buyers also
1]:
distribution of
(overall)
continuously dif ferentiable distribution function
take
into account
any
equilibrium effects
(see
below)
For a full and careful treatment of the model, see Milgrom (1981).
I
simply give the unraveling result and
Suppose that
about q?
seller refuses
a
Clearly,
to
a
Here,
heuristic justification.
disclose
q.
What should buyers infer
they should not infer that q is at the top of the range
-
then lower q's would follow that concealment strategy).
(for if they did so,
But then buyers' beliefs have to be such that if q were in fact at the top of
the
range,
then
the
seller would rather
reveal
q.
argument to the range remaining after the top q's drop out
A
were p.
little
Then,
more
if q
formally,
>
p,
a
items are of quality q < p.
suppose
the
price
for
we
Ne.xt,
a
seller would rather label,
.
.
apply the
.
and so on.
wholly unlabeled
so
same
item
that all unlabeled
Since p must equal the average quality of unla-
beled items, this implies that none have quality strictly less than p: but the
only way this can happen in equilibrium is for p to be zero.
Thus we have:
PROPOSITION 2.1 (GROSSMAN, MILGROM)
2.1
With the assumptions discussed above, buyers are as pessimistic as possible
that is, if q is not revealed, or is only partly revealed,
-
that q has the
result,
lov;est value
buyers infer
compatible with whatever has been revealed.
in equilibrium buyers know the value of q for each item,
As a
and the allo-
cation is as if revelation were compulsory.
In Sections
2.1
of
3
and 4,
we will briefly discuss
allowing for incompletely informed sellers.
follow, which we will not do here,
lies are in effect impossible.
the
impact
Another
on Proposition
natural path
to
is to relax the very strong assumption that
M o4-4G7
3.
.
ALLOWING FOR UNINFORMED SELLERS: A CONTINUITY RESULT AND A
CONTRARY RESULT
this
In
(1983)
section,
briefly
we
describe
model
the
Farrell
of
This enables us to
it by making the fraction G of informed sellers exogenous.
1:
a
of unlabeled items
Sobel
then we simplify
which allows for costs of sellers becoming informed;
show that the equilibrium price p(G)
and
continuous at G =
is
result (due to Farrell and Sobel) which seems to suggest that the Gross-
man/Milgrom assumption (G =
1)
is reasonable as an approximation.
then show that the derivative p'(G) is
argue that this suggests
Initially,
However,
F(»).
item, without
a
(negatively)
seller
infinite at G =
can,
by paying
a
cost
this being observed by buyers.
q,
and
a
and
,
I
particular seller's
c
have prior beliefs
like buyers,
c,
learn
the quality
This information cost
tributed according to the distribution function G(»);
pendently of
1
certain non-robustness.
sellers do not know q: they,
a
However, we
c
is
is not observable
c'^,
such that
rent between buying and not buying information.
We
a
is dis-
distributed indeto buyers.
Equilibrium will now be characterized by two related variables:
for unlabeled items, and a cutoff value
c
of his
a
price p
c^-seller is indiffe-
consider only "unlabeled"
and fully labeled items, because partial revelation of q would reveal that the
seller was informed, and thus Grossman
-
Milgrom would apply to him.
Informed
sellers who conceal q are riding on the coattails of uninformed (therefore, on
average, of average quality) sellers.
We have two equations for p and c*.
First,
the seller's ex-ante decision
problem yields as an equilibrium condition:
P =
Second,
-
p
c* +
must
/J
be
max(p, q) dF(q)
the
average
(3.1)
quality
of
unlabeled
items.
This
includes the genuinely uninformed, and the informed who found q < p:
average
TN O4-407.1
7
p ^
[1
-
G (c-)]
/J
G(c-)]
-
[1
q dF(q)
+
G(c-)/P q dF(q)
+
^3_2)
G(c-) F(p)
Existence and properties of solutions to (3.1,
For
and Sobel.
purposes of
the
this
are
3.2)
we
section,
discussed in Farrell
simplify by assuming that
G(») has a very special form:
G(c)
=GifO<c<l
= 1 if c =
(3.3)
1
Thus a fraction G of sellers have zero information costs
be informed)
while
,
never be informed.
p[l
-
(1
-
have large enough information costs that they will
G)
Then we have
G + G F(p)]
=
a
single equation determining p:
G]q + G /P q dF(q)
-
[1
where q is the mean value,
(and so will always
(3.4)
q dF(q)
/
Integrating by parts in (3.4) gives us
H (p,G)
E
p
(1
-
G)
+ G /P F(q)
dq
-
(1
-
G)
q -
(3.5)
The function H is dif f erentiable in p and G, and has positive partials in
both variables.
This implies
that p is uniquely defined given G, and that p
is continuous and monotone decreasing in G.
^=
(q
-
q>OatG
which becomes
|S-=
(1
/P F(q)dq
P) +
-
G)
+ G F
(3.6)
l,p
=
= 0,
1
v;hile
(3.7)
(p)
which becomes zero at G =
However, we have
,
p = 0.
Til
S4-4C7
.
8
Thus, dp/dG =
3.1
-
Summarizing, we have
at G = 1.
oo
PROPOSITION:
Defining p(G) by (3.4), the function p(») is uniquely defined, continuous
However, at G =
and monotone decreasing.
1
,
p'(G) =
-oo.
The significance of the infinite derivative is the following.
nuity result shows
form of robustness of the unraveling result, in the sense
a
that if G is very close to
1
then p will be almost zero.
Taylor expression of p(G) around G =
p(G)
=
For values
p(l) if G
=
close
of G,
=
p(l)
Plainly,
-
(3.9)
(3.9)
1)
gives
a
does
if G
=
[1
for G
-
1,
however,
1]
ought
to
take
concerning whether we
to deal v;ith cases in which G is "near" 1.
1
<
we
(3.9)
different sense from (3.8)
the uniform distribution on [0,
G + G p]
to
1.
that p(G)
=
-
oo
for
G
<
1,
any more than
1.)
To close this section, we solve
-
close,
This then gives us
=
not claim
(3.8) claims that p(G) =
p[l
one-term
1:
but not very
should rely on the model with G =
(Of course,
a
(3.8)
(G -
oo
This is
1
another term in the Taylor series.
P(G)
The conti-
a
simple example explicitly.
so that F
G] i- + G -i-p^
(x)
e
x.
Let F(«) be
Then (3.4) becomes:
(3.10)
iW S4-407
.
9
Multiplying by
2
G and rearranging gives:
G^ p^ + 2 G (1
whose solution p
"^
p = G
0.3
P
-
^-^791
so that a
0.23.
[/(I
G)
p
-
-
G
(1
(1
-
G)]
G)
=
is
>
for instance,
Thus,
-
-
G)
-
if G = 0.91,
0.09
=
9% change in G,
(3.11)
then
0.21
„ ^,
°-23
oTTi =
from
1
to 0.91,
produces a change from p =
The lesson is that continuity results must be viewed with care.
we ask about robustness, we may be concerned with more than continuity.
to p =
When
TN S4-407.1
10
DO DISCLOSURE REQUIREMENTS INCREASE DISCLOSURE?
4.
In
this section,
information
more
apply the Farrell-Sobel
we
emerges
if
would be
this
informed are
more
model to ask whether
likely
to
obliged to
be
Given the amount of information acquired by sell-
reveal their information.
ers,
the
(19S3)
true;
however,
the
prospect
of
compulsory
revelation
We will show
reduces the incentive to become informed, given the value of p.
that the net results on information flow are ambiguous.
In
Farrell-Sobel model,
the
suppose that there is
will be obliged to
a
described at the beginning of Section
as
probability
z
that a seller who becomes
>
reveal his information.
the degree of enforcement of disclosure
(We
rules,
can think
perhaps,
of
z
as
3,
informed
measuring
although that inter-
pretation might suggest that there vjould be more disclosure near p,
and less
near zero, than we will suppose.)
Then equations (3.1) and (3.2) are modified as follows: (3.1) becomes
p = -c* + zq +
(1
-
z)/
max(p, q) dF(q)
(4.1)
and (3.2) becomes
p ^
1
It
is
G(c*) + z G(c^)]q +
-
[1
-
easy to
G(c*) +
see
z
that
-
(1
z) G(c*)
0(0^^)
+
(4.1)
represents
(1
-
z)
G(c'^)
a
/g q dF (q)
^^_2)
F(p)
downward-sloping curve in (c*, p)
space, which shifts down and left with an increase in z.
(4.2) also represents a downward sloping curve, but this curve moves up when z
increases.
c*.)
(A
larger
z
makes buyers less cynical about unlabeled items, given
Thus we have two cases:
34--;07.1
[N
11
if (4.1)
i)
is steeper than
then dp/dz
(4.2),
these effects tend to reduce
and dc*/dz
>
information transmitted:
the
information is obtained by sellers,- and p rises,
so less
ment is more attractive.
0.
<
Both
c* falls,
so conceal-
These effects work against the direct reve-
lation-producing effect of the increase in
z
,
overall the result
so
is ambiguous.
if (4.2)
ii)
is steeper than
both indirect effects,
then dp/dz
(4.1),
as
well as
the
<
and dc*/dz
>
direct effect of z,
0.
Then
lead to
more information being revealed.
say whether
Can we
case
(i)
or
answer that question, we examine
form on [0,
(1
-
z)
(ii)
is
(4.1)
be
to
expected?
In
and (4.2) when F(»)
an
attempt
and G(»)
to
are uni-
Then (4.1) reduces to
1].
p^
c* =
2p +
1
-
C^p^ + (1
-
c* + zc*)(2p
-
(4.3)
and (4.2) becomes
(1
-
z)
-
1)
=
(4.4)
The (absolute) slopes are given by
(4.5:
slope of (4.3) =
2p(l-z)-2
2-2p(l-z)
slope
of (4.4) = ^'.: "^^P^ ' ^P
^
^
^
20^^(1 - z)p + 2
We can readily compare
(4.5)
is greater,
(4.5)
and
;/^
{1 -
(4.6)
z
increases revelation,
the incentive
(4.6)'
only when
^
z
is
close to 1:
then
which tells us we are in the ambiguous case (i).
This ambiguity should not surprise us
of
^
.
c^ + zc^)
to become
:
we
know that the "direct effect"
but the prospect of compulsory revelation reduces
informed, and the less cynicism of buyers about unla-
beled items makes it more tempting to conceal information.
IN O4-407.1
12
5.
WELFARE EFFECTS OF INFORMATION
The alert reader may have noticed that,
efficiency benefits of information.
information is
Farrell and Sobel (1983).
go through.
unknov.'n
(as
quality is the expected social
Constructing models with
little more complicated:
a
there are no
The reason is that the social value
measured by market price) of an item of
value of an item of known quality.
in the models above,
a
social value of
see Burdett and Hortensen
(1980) or
However, the basic ideas described above will still
In this section, we try to get a sense of the size of the alloca-
tive efficiency benefits of information.
Used cars differ in their probability of breakdown,
their
costs
variation:
of experiencing
people's
being far from
a
value
service
of
a
breakdown.
time
differs;
station differs,
Among
the
the
and people differ in
reasons
probability
for
of
the
a
latter
breakdown
and people vary in how well
they
cope with the consumer's nightmare of auto repair.
The direct allocative efficiency effects of more information lie in get-
ting the most reliable cars to those who most value reliability.
To gain some
notion of these benefits, we carry out an illustrative calculation.
TN S4-407.1
13
5.1
PERCENTAGE SAVINGS FROM INFORMATION: DIRECT EFFECTS
Suppose that cars differ in their probability p of having
breakdown,
a
and suppose p is uniformly distributed (among used cars) on [.1,
moreover
that
cost
the
drivers
to
c
of
such
a
between one hundred dollars and one hundred eighty dollars,
suggested
above.
(One
might
expect
those
with
the
very
for
uniformly
reasons
the
highest
^
Suppose
.9].
breakdown varies
<
costs
of
breakdown to choose new cars, or to have their cars inspected: thus the upper
tails will be truncated.)
Then efficiency requires that the car with break-
down probability p be assigned to the driver with cost
c =
180
-
(p -
= 190
-
100 p.
100
.1)
Such an arrangement will give total cost of breakdowns
C* =
Q
.
^
o
/?
.1
-
P(190
100 p) dp
This "probability of breakdown" may be an aggregate figure,
ferent breakdowns by seriousness, in the following sense.
n
different possible breakdov/ns,
If buyer
i.
j
has cost
c
and
weighting dif-
Suppose there are
car has probability p.
a
of breakdown
i,
of breakdown
then the cost of assigning this
car to him is
n
p.c^
Z
(A)
Suppose that, for all buyers
c^/c^ -
11
for some
c.,
repair is
this case,
"/c k
c
j
,
k,
and all i,
(^)
'
independent of
twice k's,
then the
i.
This
says that,
same will be
(not likely to hold exactly,
true
if j's cost for
for
all other
a
certain
repairs.
In
like most aggregation conditions, but
:N
S4-407.1
14
.8C* = 95
(.1)']
[(.9)'
= 95 X
-
'I'
[(.9)^
(.1)^]
-
33.3 X .728
.8 -
= 76 - 24.26
= 51.74
Now suppose instead that the revelation system is imperfect, and all cars with
p >
indistinguishable to buyers.
are
.5
Thus those cars are matched randomly
to the buyers in the lower half of the cost distribution.
/
p(190
-
100 p) dp + f't p
= 95
[(.5)2
-
(.1)2]
.8C =
+ 60
= 95 X .24
[(.9)2
-
-
7
•
Now we have:
120 dp
[(.5)2- (.1)2]
(.5)2]
33.3 x .124 + 60 x .56
= 22.8 - 4.1 + 33.6
a
reasonable central case) we can write (A) as
c.
p.
Z
i=l
c.
and write
n
p
I
.
c
.
1
'^i
i=l
as p
(for this particular car).
imizing
I
pc
,
Then the optimization problem reduces to min-
where the sum is over cars or buyers (equivalently)
TN 84-407.
15
= 52.3
This is only about 1.5% greater than the full information cost figure.
If all cars are indistinguishable, we have random allocation,
.SC" = 140
f^
and
p dp
= 70 X [.9^
.1^]
-
= 70 X .8
= 56
Thus the direct efficiency effects of information are rather modest:
c"
-
4.26
c*
=
56
In other v/ords,
alent of
a 7
.076 as a fraction of no-information costs.
even if information does not emerge at all, this is the equiv-
1/2% increase in breakdowns: serious, but not
a
terrible problem.
We generalize this calculation by noting that
E(pc) = cov (p, c) + E(p) E(c)
and that,
(5.1)
while random allocation makes cov
in this case makes cov (p,
c)
= - A'ar(p)
(p,
var(c).
c)
= 0,
efficient allocation
Hence the proportional sav-
ings from efficient allocation are equal to
%
E(p)
°c
E(c)
(5.2)
the product of the "relative variations" o /E(p) and o /E(c).
Note that (5.1)
P
is general, but (5.2) applies only when efficient allocation gives a correla*-•
t:j
3-;--;o7.i
16
tion coefficient of (-1) between p and c.
In general,
perfect negative relationship between p and
that this relationship is also linear,
as
but it is only in special cases
c,
required to obtain (5.2).
We next derive a simple expression for
ables are
,
a
Thus,
in
information is less valuable than (5.2) suggests.
general,
b]
efficiency requires
uniformly distributed.
where
Suppose x
(5.2)
in the
case where
the vari-
uniformly distributed on
is
[a,
Then
< a < b.
a+b
E(x) -
b-a
^^^(^) =
b?l
4
i''^^ =
I2
^^-^^'
So the relative variation of x is
0^
^1
(b-a)
^/3
a+b
=
E(x)
^
2a
a+b
_1^^_
/3
If b = ma, where m > 1,
this becomes
»
^
.
Thus, as one would expect,
1+m
large dispersions
-
i.e.,
large values of m
(for p
and/or for c) give greater cost savings; but in no case can information save
as much
as a
third of the costs.
The percentage
values of m are given below:
1.25
1.5
2
4
1.25
0.4
0.7
1.2
2.2
3
1.5
0.7
1.3
2.2
4
5.5
2
1.2
2.2
3.7
6.7
9.1
4
2.2
4
6.7
12.0
16
10
3
5.5
9.1
16
22
10
savings for some reasonable
IN 84-407.1
17
The notable
thing about this is that only for quite large values of m do
the savings become "substantial"
(say,
in excess of
Remember also that
10%).
represents an extreme comparison: perfect information versus no informa-
this
saw
we
As
tion.
achieves quite
a
above,
lot of
if
some
of
the potential
the
information
savings
emerges,
from full
it
already
information.
Thus,
these direct allocative efficiency benefits from information are surprisingly
small.
distributions have
If the
will be smaller.
central tendency, the gains from information
a
For instance, suppose each distribution has
uniformly distributed,
v;ith
(1
-
being an atom at the mean.
X)
the same for the two distributions
of its weight
\
(of p and of c),
Provided
we still get
a
X
is
very simple
formula for the proportional gain from information:
,2
X
c
p
E(p)
E(c)
(With more general distributions,
write
dov;n
the efficient allocation is
provided all cars have positive value,
body in the
to
efficient allocation.
Thus the
result is
the fact
each will be allocated to some-
social value of knowing about
repair whose cost is the same to every buyer is zero.
to
simple
and manipulate.)
The intuition behind this surprising (to many people)
that,
less
a
One's intuition tends
start from the private incentive not to be the person landed with the bad
car
5.2
INDIRECT EFFECTS
V^hen
ket,
the
this
goods of different qualities are not duly distinguished by the marv;ill
have
used car market,
feedback
one v;ill
effects on
see
this
incentives to maintain quality.
in
two
forms.
First owners
In
of cars
TM 34-407.1
18
intending to sell them used will not have enough incentive to maintain their
cars.
Second auto makers, who sell to new buyers most of whom (at least tra-
ditionally) will sell the used car, will not have as much incentive as would
be
desirable to make the
cars
last
longer than
These effects may well be important, but
I
the
tenure
of first
owners.
do not know how to quantify them.
IN £4-407
.
19
CONCLUSION
6.
We
tentatively view this
episode
as
one
in
which market
participants
fought hard over rather doubtful distributional gains, and in which the direct
efficiency stakes were smaller than one might think.
of regulation suggest that questions close
Interest-group theories
to purely distributional will
tend
However, it is far from clear in this case that
to produce a lot of conflict.
all parties were behaving rationally.
Economic
does a poor
theory
participants.
It may be
Alternatively,
favor, despite
the fact
the attitudes
of market
many market participants may have
Sellers were almost uniformly against more
been wrong in their prediction.
enforcement.
of predicting
that theory's predictions of the outcomes under dif-
ferent rules are mistaken.
disclosure
job
equally uniformly
in
that prices measure value under all sets of rules,
so
Consumer
representatives
were
that not all consumers would benefit from more market information.
This raises an important methodological problem.
entry and exit, and very low level of sunk costs,
tate in writing down zero-profit equations
industry with
expected not
rules,
with
each
this
free
to
entry and exit
have
firm would earn
argument;
views
strong
a
perhaps,
ease of
few economists would hesi-
for the used-car industry.
Yet an
ensuring zero profits would naturally be
on
the
rules
normal profit.
it
In view of the
is
that
of
the
Evidently,
important
game:
whatever
something is wrong
comparative
advantages
translate into rents which will be affected by changes in the rules.
itself is not
a
very interesting observation: but the caveat against
ral" jump to a false conclusion may be important.
the
This in
a
"natu-
ilj
54-407
.
20
7.
1.
Automotive News
2.
Burdett,
K.
,
,
REFERENCES
(1979-1984), passim
and D.
Hortensen,
.
(1980),
"Testing for Ability in
a
Com-
petitive Labor Market," Journal of Economic Theory.
3.
Farrell,
J.,
and J. Sobel,
(1983),
"Voluntary Disclosure," unpublished
notes.
4.
Grossman, S.,
(1981),
"The Informational Role of Warranties and Private
Disclosure about Product Quality," Journal of
5.
Milgrom,
P.,
(1981),
"Good Nev;s
Lav;
and Bad News:
and Applications," Bell Journal of Economics 12.
5bjSLv
..
O
and Economics 24.
Representation Theorems
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