The Good, the Bad and the Complex: Product Design with Imperfect Information
56 Pages Posted: 25 Feb 2021
Date Written: September 8, 2020
We study the joint determination of product quality and complexity in a rational setting. We introduce a novel notion of complexity, which affects how costly it is for an agent to acquire information about product quality. In our model, an agent can accept or reject a product proposed by a designer, who can affect the quality and the complexity of the product. Examples include banks that design financial products that they offer to retail investors, or policymakers who propose policies for approval by voters. We find that complexity is not necessarily a feature of low quality products. While an increase in alignment between the agent and the designer leads to more complex but better quality products, higher product demand or lower competition among designers leads to more complex and lower quality products. Our findings produce novel empirical implications on the relationship between quality and complexity, which we relate to evidence within the context of financial products and regulatory policies.
Keywords: complexity, information acquisition, signaling, regulation, financial products
JEL Classification: D82, D83, G18, P16, D78
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