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Communicating quality: a unified model of disclosure and signalling

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  • We thank two anonymous referees and seminar participants at the California Institute of Technology, Duke University, Georgetown University, New York University, Santa Clara University, Southern Methodist University, the University of Arizona, the University of Bonn, the University of California–San Diego, the University of Southern California, and Vanderbilt University for comments on earlier drafts.

Abstract

Firms communicate product quality to consumers through a variety of channels. Economic models of such communication take two alternative forms when quality is exogenous: (i) disclosure of quality through a credible direct claim; or (ii) signalling of quality via producer actions that influence buyers' beliefs about quality. In general, these two literatures have ignored one another. We argue that firms should be viewed as choosing which means of communication they will employ. We show that integration of these two alternatives leads to new implications about disclosure, signalling, firm preferences over type, and the social efficiency of the channel of communication employed.

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