Culture, Society & Family Economics & Statistics Feature Researcher news

SMU economist wins $50,000 “budding genius” prize with highly cited corruption research

Serra questioned long-standing assumptions; found corruption declines as perpetrators take into account social costs of their illegal activities, and as victims share information about specific bribery exchanges through online reporting systems.

Guilt and shame play a role in reducing bribery, according to research by economist Danila Serra, Southern Methodist University, Dallas.

As an economist who has studied bribery behavior extensively, Serra has discovered that bribery declines if potentially corrupt agents are made aware of the negative effects of corruption, and when victims can share specific information about bribe demands through online reporting systems.

An assistant professor in the SMU Department of Economics, Serra’s research methodology is unique — relying on lab experiments in which players gain and lose real money. Her work is frequently cited by other researchers studying the field of bribery.

In November the directors and officers of the International Foundation for Research in Experimental Economics honored Serra as the inaugural recipient of the $50,000 Vernon L. Smith Ascending Scholar Prize. The Smith Prize is described by the foundation as a “budding genius” award.

“Dr. Serra’s accomplishments have marked her as an ascending scholar, teacher, mentor and colleague of exceptional promise,” said a statement from the foundation.

The prize is named for Nobel Laureate Vernon L. Smith, considered the father of experimental economics. It aims to build on his legacy and inspire recipients, early on in their careers, to set the loftiest possible goals for themselves as social-science theorists, practitioners, colleagues, mentors and truth seekers, the foundation said.

Serra’s interest in understanding bribery transformed in 2005 when she became frustrated by measurement problems and the difficulty of finding good data. Her goal was to identify and understand the causes of corruption, and in particular whether non-monetary motivations, social norms and culture play any role in corruption decision-making. During her Ph.D. work at the University of Oxford, economist Abigail Barr exposed Serra to lab experiments, a relatively new methodology for the field of economics.

“I was always interested in corruption. As soon as I discovered the field of experimental economics I decided to design and implement bribery experiments,” Serra said. “I recreate the situation I want to study in a laboratory setting, employing real monetary incentives, which we provide, and with scenarios where the subjects can make corruption decisions that increase their money at the expense of other players. The play is anonymous and they get to bring home the money they earn in the experimental setting.”

Corruption isn’t purely about money
The focus of Serra’s research sharpened further when she began to question the root assumption that guilt and shame don’t play a role in bribery. She found in laboratory experiments that the intrinsic costs of guilt and shame do matter, and that corruption isn’t purely a matter of money.

She found that corruption declines when potentially corrupt agents are made aware of the negative impact of their actions, and when bottom-up anti-corruption mechanisms are in place, such as victims sharing specific information about bribe demands. Serra also found evidence of a significant relationship between corruption and culture.

“In one of my early studies, I employed a sample of international students at the University of Oxford and found among undergraduate students that the level of corruption in their home country predicts their propensity to engage in corruption in my bribery experiment,” she said.

“This is what we’d expect, they have internalized corrupt norms,” Serra said. “But the surprising result is that this wasn’t true for graduate students. We concluded that graduate students do not conform to the prevailing social norms of their home countries and, possibly, they want to distance themselves from such norms.”

Serra’s research has produced 12 papers on bribery and she has edited a book about experimental research on corruption. Her work on corruption has been cited hundreds of times by other researchers in the field. She has also investigated issues related to governance, public service provision and bottom-up accountability in developing countries. More recently, she has embarked on new research exploring gender differences in behaviors and outcomes in a variety of contexts, including students’ choices of major.

Serra launched and is co-leader of the Laboratory for Research in Experimental Economics at SMU’s Economics Department in the Dedman College of Humanities & Sciences.

The Vernon L. Smith Ascending Prize for Serra is a major professional recognition of the profound impact of her pioneering research in the area of experimental public economics and in particular on the understanding of corruption and other forms of rule breaking, said SMU economist Santanu Roy, chair of the SMU Department of Economics and University Distinguished Professor.

“She is one of the most cited economists of her generation,” Roy said. “The prize comes with a $50,000 award which, as far as I know, is the largest amount awarded as a prize for young economists. The fact that Dr. Serra was chosen to receive the inaugural prize named for the father of experimental economics tells us about the high expectations that her peers have about her future research productivity.”

Economics as an empirical discipline
The Smith Prize seeks to inspire early-career scholars to emulate Smith’s joyous zeal for scientific discovery. It may be used flexibly to advance social science in whatever manner a recipient chooses, the foundation said.

The prize is made possible through the Rasmuson Foundation and other contributors.

As a social scientist, Smith was committed to exploring theoretical foundations in economics, social science, and science generally; achievement in the form of quantifiable impacts in transforming economics into an experimental and more empirical discipline; collegiality in funding, mentoring, and collaborating with fellow scholars; and curiosity in looking beyond traditional disciplinary boundaries in search of truth.

“The International Foundation for Research in Experimental Economics heartily congratulates Dr. Serra and looks forward to following her career in the years to come,” the statement said. — Margaret Allen, SMU

Culture, Society & Family Economics & Statistics Events Researcher news SMU In The News

Elira Kuka, SMU economics professor, appointed to prestigious national research organization

SMU economics professor wins prestigious appointment to nation’s premier organization for impartial economic research, the National Bureau of Economic Research.

The National Bureau of Economic Research, the nation’s leading nonprofit economic research organization, has appointed SMU Assistant Professor Elira Kuka a faculty research fellow.

Kuka is in the SMU Department of Economics. She will be a fellow in the NBER’s research program on children, a key policy area.

NBER, founded in 1920, is a private, non-profit, non-partisan organization dedicated to conducting economic research and to disseminating research findings among academics, public policy makers and business professionals.

The National Bureau of Economic Research (NBER) is the most prestigious and active research organization in economic policy and empirical analysis in the U.S., said University Distinguished Professor Santanu Roy, chair of the SMU Department of Economics. Several Nobel laureates and Chairs of the Council of Economic Advisers (to the White House) have been fellows of the NBER, Roy said.

“To be appointed a Faculty Research Fellow at the NBER is a tremendous recognition for a young scholar like Elira Kuka, who is just completing her second year as assistant professor after her Ph.D. It is a major boost to the SMU Economics Department’s research profile and visibility,” Roy said. “Elira’s work on several important public policy issues related to children’s health, unemployment insurance and education have started appearing in the very top journals of the profession. She is on a firm trajectory to be a star in her research field.”

NBER-affiliated researchers study a wide range of topics and they employ many different methods in their work. Key focus areas include developing new statistical measurements, estimating quantitative models of economic behavior and analyzing the effects of public policies while remaining impartial and foregoing recommendations.

Over the years the NBER’s research agenda has encompassed a wide variety of issues that confront our society. Twenty-six Nobel Prize winners in Economics and 13 past chairs of the President’s Council of Economic Advisers have held NBER affiliations.

The more than 1,400 professors of economics and business now teaching at colleges and universities in North America who are NBER researchers are the leading scholars in their fields.

Kuka joined SMU in 2015. She received an undergraduate degree from Wellesley College, Mass., and her Ph.D. in economics from the University of California at Davis. Her research focuses on understanding how government policy affects individual behavior and wellbeing, the extent to which it provides social insurance during times of need, and its effectiveness in alleviation of poverty and inequality.

Her current research topics include the potential benefits of the federal Unemployment Insurance program, the protective power of the U.S. safety net during recessions and various issues in academic achievement.

Kuka’s appointment was effective May 1, 2017.

Culture, Society & Family Economics & Statistics Researcher news SMU In The News

Quartz: When diverse groups interact, everybody ends up smarter and healthier

“…although individuals may feel antagonism towards other groups in society, that prejudice is less strong if they interact with these groups in their daily lives.” — Desmet, Gomes and Ortuño-Ortín

Quartz internet news magazine covered the research of SMU Economics Professor Klaus Desmet and colleagues. The article reported that the new study by Desmet and two other economists found that after examining data from nearly every country in the world, they find that when diverse groups interact, it leads to better outcomes in terms of health, education and public infrastructure.

“Chalk one up for contact theory,” wrote San Francisco-based reporter Dan Kopf, who covers economics and markets and has a Masters in Economics from the London School of Economics.

Desmet, who has his degree from Stanford University, is Ruth and Kenneth Altshuler Centennial Interdisciplinary Professor. His research interests include international trade, regional and urban economics, macroeconomics and political economy.

Desmet’s work is likely to be of profound significance for actual policy makers, according to Santanu Roy, University Distinguished Professor and Chair of the SMU Department of Economics.

“Klaus Desmet is engaged in truly path breaking research in undestanding the spatial, cultural and genetic dimensions of the global economy and the deep long run determinants of economic change,” said Roy. “Over the last few years, his work has been published in the very top journals in economics such as the American Economic Review and the Journal of Political Economy, a major boost to the reputation and visibility of the SMU economics department.”

The Quartz article, “When diverse groups interact, everybody ends up smarter and healthier,” published March 24, 2017.

Read the full story.


By Dan Kopf

A striking fact about the tide of nationalism sweeping through the West is that it is strongest in places with the least diversity. Supporters of Donald Trump, and his “America first” policies, generally come from areas of the US least touched by immigration. The parts of the UK that opted to “take back control” by voting for Brexit also clustered in areas with fewer foreign-born residents.

But as a group of economists note, “although individuals may feel antagonism towards other groups in society, that prejudice is less strong if they interact with these groups in their daily lives.”

In recently released research (pdf), Klaus Desmet, Joseph Gomes, and Ignacio Ortuño-Ortín go well beyond examining the demographics of Trump and Brexit voters. Their research explores whether contact theory, the belief that increased interaction leads to better relations between groups, or conflict theory, that interaction leads to more prejudice, is a better way to describe the current state of the world. They examined data from nearly every country in the world, and find that when diverse groups interact, it leads to better outcomes in terms of health, education, and public infrastructure. Chalk one up for contact theory.

A vast body of earlier research has found, however, that ethnic and linguistic diversity tends to reduce spending on public goods. This is usually explained as a preference not to share with people perceived to be different. For example, Sweden’s high government spending versus the US might be down to Sweden’s relative lack of diversity.

This suggests that diversity is not helpful if groups mainly keep to themselves. To test this assumption, Desmet, Gomes, and Ortuño-Ortín divided the world into a grid of five-square-kilometer cells and estimated the number of people who speak different languages in each. Using this data and country-level estimates of diversity, the researchers calculated two numbers:

1) Country diversity: The probability that within a country two randomly chosen people speak the same language. A higher score means greater diversity in languages spoken.

Read the full story.

Culture, Society & Family Earth & Climate Economics & Statistics Energy & Matter Events Fossils & Ruins Health & Medicine Learning & Education Mind & Brain Plants & Animals Researcher news Student researchers

SMU 2015 research efforts broadly noted in a variety of ways for world-changing impact

SMU scientists and their research have a global reach that is frequently noted, beyond peer publications and media mentions.

By Margaret Allen
SMU News & Communications

It was a good year for SMU faculty and student research efforts. Here is a small sampling of public and published acknowledgements during 2015:

Simmons, Diego Roman, SMU, education

Hot topic merits open access
Taylor & Francis, publisher of the online journal Environmental Education Research, lifted its subscription-only requirement to meet demand for an article on how climate change is taught to middle-schoolers in California.

Co-author of the research was Diego Román, assistant professor in the Department of Teaching and Learning, Annette Caldwell Simmons School of Education and Human Development.

Román’s research revealed that California textbooks are teaching sixth graders that climate change is a controversial debate stemming from differing opinions, rather than a scientific conclusion based on rigorous scientific evidence.

The article, “Textbooks of doubt: Using systemic functional analysis to explore the framing of climate change in middle-school science textbooks,” published in September. The finding generated such strong interest that Taylor & Francis opened access to the article.


Research makes the cover of Biochemistry
Drugs important in the battle against cancer were tested in a virtual lab by SMU biology professors to see how they would behave in the human cell.

A computer-generated composite image of the simulation made the Dec. 15 cover of the journal Biochemistry.

Scientific articles about discoveries from the simulation were also published in the peer review journals Biochemistry and in Pharmacology Research & Perspectives.

The researchers tested the drugs by simulating their interaction in a computer-generated model of one of the cell’s key molecular pumps — the protein P-glycoprotein, or P-gp. Outcomes of interest were then tested in the Wise-Vogel wet lab.

The ongoing research is the work of biochemists John Wise, associate professor, and Pia Vogel, professor and director of the SMU Center for Drug Discovery, Design and Delivery in Dedman College. Assisting them were a team of SMU graduate and undergraduate students.

The researchers developed the model to overcome the problem of relying on traditional static images for the structure of P-gp. The simulation makes it possible for researchers to dock nearly any drug in the protein and see how it behaves, then test those of interest in an actual lab.

To date, the researchers have run millions of compounds through the pump and have discovered some that are promising for development into pharmaceutical drugs to battle cancer.

Click here to read more about the research.

SMU, Simpson Rowe, sexual assault, video

Strong interest in research on sexual victimization
Teen girls were less likely to report being sexually victimized after learning to assertively resist unwanted sexual overtures and after practicing resistance in a realistic virtual environment, according to three professors from the SMU Department of Psychology.

The finding was reported in Behavior Therapy. The article was one of the psychology journal’s most heavily shared and mentioned articles across social media, blogs and news outlets during 2015, the publisher announced.

The study was the work of Dedman College faculty Lorelei Simpson Rowe, associate professor and Psychology Department graduate program co-director; Ernest Jouriles, professor; and Renee McDonald, SMU associate dean for research and academic affairs.

The journal’s publisher, Elsevier, temporarily has lifted its subscription requirement on the article, “Reducing Sexual Victimization Among Adolescent Girls: A Randomized Controlled Pilot Trial of My Voice, My Choice,” and has opened it to free access for three months.

Click here to read more about the research.

Consumers assume bigger price equals better quality
Even when competing firms can credibly disclose the positive attributes of their products to buyers, they may not do so.

Instead, they find it more lucrative to “signal” quality through the prices they charge, typically working on the assumption that shoppers think a high price indicates high quality. The resulting high prices hurt buyers, and may create a case for mandatory disclosure of quality through public policy.

That was a finding of the research of Dedman College’s Santanu Roy, professor, Department of Economics. Roy’s article about the research was published in February in one of the blue-ribbon journals, and the oldest, in the field, The Economic Journal.

Published by the U.K.’s Royal Economic Society, The Economic Journal is one of the founding journals of modern economics. The journal issued a media briefing about the paper, “Competition, Disclosure and Signaling,” typically reserved for academic papers of broad public interest.

The Journal of Physical Chemistry A

Chemistry research group edits special issue
Chemistry professors Dieter Cremer and Elfi Kraka, who lead SMU’s Computational and Theoretical Chemistry Group, were guest editors of a special issue of the prestigious Journal of Physical Chemistry. The issue published in March.

The Computational and Theoretical research group, called CATCO for short, is a union of computational and theoretical chemistry scientists at SMU. Their focus is research in computational chemistry, educating and training graduate and undergraduate students, disseminating and explaining results of their research to the broader public, and programming computers for the calculation of molecules and molecular aggregates.

The special issue of Physical Chemistry included 40 contributions from participants of a four-day conference in Dallas in March 2014 that was hosted by CATCO. The 25th Austin Symposium drew 108 participants from 22 different countries who, combined, presented eight plenary talks, 60 lectures and about 40 posters.

CATCO presented its research with contributions from Cremer and Kraka, as well as Marek Freindorf, research assistant professor; Wenli Zou, visiting professor; Robert Kalescky, post-doctoral fellow; and graduate students Alan Humason, Thomas Sexton, Dani Setlawan and Vytor Oliveira.

There have been more than 75 graduate students and research associates working in the CATCO group, which originally was formed at the University of Cologne, Germany, before moving to SMU in 2009.


Vertebrate paleontology recognized with proclamation
Dallas Mayor Mike Rawlings proclaimed Oct. 11-17, 2015 Vertebrate Paleontology week in Dallas on behalf of the Dallas City Council.

The proclamation honored the 75th Annual Meeting of the Society of Vertebrate Paleontology, which was jointly hosted by SMU’s Roy M. Huffington Department of Earth Sciences in Dedman College and the Perot Museum of Science and Nature. The conference drew to Dallas some 1,200 scientists from around the world.

Making research presentations or presenting research posters were: faculty members Bonnie Jacobs, Louis Jacobs, Michael Polcyn, Neil Tabor and Dale Winkler; adjunct research assistant professor Alisa Winkler; research staff member Kurt Ferguson; post-doctoral researchers T. Scott Myers and Lauren Michael; and graduate students Matthew Clemens, John Graf, Gary Johnson and Kate Andrzejewski.

The host committee co-chairs were Anthony Fiorillo, adjunct research professor; and Louis Jacobs, professor. Committee members included Polcyn; Christopher Strganac, graduate student; Diana Vineyard, research associate; and research professor Dale Winkler.

KERA radio reporter Kat Chow filed a report from the conference, explaining to listeners the science of vertebrate paleontology, which exposes the past, present and future of life on earth by studying fossils of animals that had backbones.

SMU earthquake scientists rock scientific journal

Modelled pressure changes caused by injection and production. (Nature Communications/SMU)
Modelled pressure changes caused by injection and production. (Nature Communications/SMU)

Findings by the SMU earthquake team reverberated across the nation with publication of their scientific article in the prestigious British interdisciplinary journal Nature, ranked as one of the world’s most cited scientific journals.

The article reported that the SMU-led seismology team found that high volumes of wastewater injection combined with saltwater extraction from natural gas wells is the most likely cause of unusually frequent earthquakes occurring in the Dallas-Fort Worth area near the small community of Azle.

The research was the work of Dedman College faculty Matthew Hornbach, associate professor of geophysics; Heather DeShon, associate professor of geophysics; Brian Stump, SMU Albritton Chair in Earth Sciences; Chris Hayward, research staff and director geophysics research program; and Beatrice Magnani, associate professor of geophysics.

The article, “Causal factors for seismicity near Azle, Texas,” published online in late April. Already the article has been downloaded nearly 6,000 times, and heavily shared on both social and conventional media. The article has achieved a ranking of 270, which puts it in the 99th percentile of 144,972 tracked articles of a similar age in all journals, and 98th percentile of 626 tracked articles of a similar age in Nature.

It has a very high impact factor for an article of its age,” said Robert Gregory, professor and chair, SMU Earth Sciences Department.

The scientific article also was entered into the record for public hearings both at the Texas Railroad Commission and the Texas House Subcommittee on Seismic Activity.

Researchers settle long-debated heritage question of “The Ancient One”

The skull of Kennewick Man and a sculpted bust by StudioEIS based on forensic facial reconstruction by sculptor Amanda Danning. (Credit: Brittany Tatchell)
The skull of Kennewick Man and a sculpted bust by StudioEIS based on forensic facial reconstruction by sculptor Amanda Danning. (Credit: Brittany Tatchell)

The research of Dedman College anthropologist and Henderson-Morrison Professor of Prehistory David Meltzer played a role in settling the long-debated and highly controversial heritage of “Kennewick Man.”

Also known as “The Ancient One,” the 8,400-year-old male skeleton discovered in Washington state has been the subject of debate for nearly two decades. Argument over his ancestry has gained him notoriety in high-profile newspaper and magazine articles, as well as making him the subject of intense scholarly study.

Officially the jurisdiction of the U.S. Army Corps of Engineers, Kennewick Man was discovered in 1996 and radiocarbon dated to 8500 years ago.

Because of his cranial shape and size he was declared not Native American but instead ‘Caucasoid,’ implying a very different population had once been in the Americas, one that was unrelated to contemporary Native Americans.

But Native Americans long have claimed Kennewick Man as theirs and had asked for repatriation of his remains for burial according to their customs.

Meltzer, collaborating with his geneticist colleague Eske Willerslev and his team at the Centre for GeoGenetics at the University of Copenhagen, in June reported the results of their analysis of the DNA of Kennewick in the prestigious British journal Nature in the scientific paper “The ancestry and affiliations of Kennewick Man.”

The results were announced at a news conference, settling the question based on first-ever DNA evidence: Kennewick Man is Native American.

The announcement garnered national and international media attention, and propelled a new push to return the skeleton to a coalition of Columbia Basin tribes. Sen. Patty Murray (D-WA) introduced the Bring the Ancient One Home Act of 2015 and Washington Gov. Jay Inslee has offered state assistance for returning the remains to Native Tribes.

Science named the Kennewick work one of its nine runners-up in the highly esteemed magazine’s annual “Breakthrough of the Year” competition.

The research article has been viewed more than 60,000 times. It has achieved a ranking of 665, which puts it in the 99th percentile of 169,466 tracked articles of a similar age in all journals, and in the 94th percentile of 958 tracked articles of a similar age in Nature.

In “Kennewick Man: coming to closure,” an article in the December issue of Antiquity, a journal of Cambridge University Press, Meltzer noted that the DNA merely confirmed what the tribes had known all along: “We are him, he is us,” said one tribal spokesman. Meltzer concludes: “We presented the DNA evidence. The tribal members gave it meaning.”

Click here to read more about the research.

Prehistoric vacuum cleaner captures singular award

Paleontologists Louis L. Jacobs, SMU, and Anthony Fiorillo, Perot Museum, have identified a new species of marine mammal from bones recovered from Unalaska, an Aleutian island in the North Pacific. (Hillsman Jackson, SMU)
Paleontologists Louis L. Jacobs, SMU, and Anthony Fiorillo, Perot Museum, have identified a new species of marine mammal from bones recovered from Unalaska, an Aleutian island in the North Pacific. (Hillsman Jackson, SMU)

Science writer Laura Geggel with Live Science named a new species of extinct marine mammal identified by two SMU paleontologists among “The 10 Strangest Animal Discoveries of 2015.”

The new species, dubbed a prehistoric hoover by London’s Daily Mail online news site, was identified by SMU paleontologist Louis L. Jacobs, a professor in the Roy M. Huffington Department of Earth Sciences, Dedman College of Humanities and Sciences, and paleontologist and SMU adjunct research professor Anthony Fiorillo, vice president of research and collections and chief curator at the Perot Museum of Nature and Science.

Jacobs and Fiorillo co-authored a study about the identification of new fossils from the oddball creature Desmostylia, discovered in the same waters where the popular “Deadliest Catch” TV show is filmed. The hippo-like creature ate like a vacuum cleaner and is a new genus and species of the only order of marine mammals ever to go extinct — surviving a mere 23 million years.

Desmostylians, every single species combined, lived in an interval between 33 million and 10 million years ago. Their strange columnar teeth and odd style of eating don’t occur in any other animal, Jacobs said.

SMU campus hosted the world’s premier physicists

The SMU Department of Physics hosted the “23rd International Workshop on Deep Inelastic Scattering and Related Subjects” from April 27-May 1, 2015. Deep Inelastic Scattering is the process of probing the quantum particles that make up our universe.

As noted by the CERN Courier — the news magazine of the CERN Laboratory in Geneva, which hosts the Large Hadron Collider, the world’s largest science experiment — more than 250 scientists from 30 countries presented more than 200 talks on a multitude of subjects relevant to experimental and theoretical research. SMU physicists presented at the conference.

The SMU organizing committee was led by Fred Olness, professor and chair of the SMU Department of Physics in Dedman College, who also gave opening and closing remarks at the conference. The committee consisted of other SMU faculty, including Jodi Cooley, associate professor; Simon Dalley, senior lecturer; Robert Kehoe, professor; Pavel Nadolsky, associate professor, who also presented progress on experiments at CERN’s Large Hadron Collider; Randy Scalise, senior lecturer; and Stephen Sekula, associate professor.

Sekula also organized a series of short talks for the public about physics and the big questions that face us as we try to understand our universe.

Click here to read more about the research.

Culture, Society & Family Economics & Statistics

Why firms prefer not to disclose product quality — and how regulators might respond

“This is a really exciting area of research where game theory based models can provide direct insights into behavior of market participants.” — Roy

SMU, Santanu Roy, Economic Journal, price signaling, regulation

Rather than explicitly revealing information about the quality of their products and services, many firms prefer to signal quality through the prices they charge, typically working on the assumption that a high price indicates high quality.

New research by Maarten Janssen, University of Vienna, and Southern Methodist University economist Santanu Roy provides a new explanation for why firms choose not to disclose quality directly – and explains how prices that are set to signal quality can distort actual buying decisions.

Their study, “Competition, Disclosure and Signalling,” which is published in the February 2015 issue of the Economic Journal, shows that when firms compete on price, not disclosing product quality voluntarily can soften competition and boost profits.

“We often use prices to form ideas about product quality. Firms understand this,” said Roy, a professor in SMU’s Department of Economics in Dedman College of Humanities & Sciences. “As a result, their strategic decisions about pricing and direct disclosure of product characteristics become intricately linked. Our research explains why firms may prefer not to disclose quality attributes of their products and instead induce buyers to try to infer quality from prices: it allows firms to sustain high prices despite strong competition.”

Finding may be a case for imposing mandatory disclosure regulation
The finding has an important policy implication for regulators: even if consumers infer all relevant product information from prices (or other actions by firms), there may be a case for imposing mandatory disclosure regulation. Such regulation can reduce market power and the price and consumption distortions resulting from firms’ use of prices to signal product quality.

“If you regulate and force firms to directly disclose quality attributes, prices may fall and lead to better market outcomes,” Roy said. “This is a really exciting area of research where game theory based models can provide direct insights into behavior of market participants. Our current research studies some related issues such as the case for ‘truth in advertising’ regulation and penalizing false advertising of product attributes.”

The researchers begin by noting that in a large number of markets, ranging from educational and health services to consumer goods and financial assets, sellers have important information about the quality of their products. Quality attributes include satisfaction from consuming the product, durability, safety and potential health hazards as well as ethical and environmental attributes.

Information about these quality attributes is not always publicly available to potential buyers or competitors. In many of these markets, firms have the option of voluntarily disclosing product information in a credible and verifiable manner – for example, through independent certification, rating agencies or regulated advertising.

Without hard, credible information about products, buyers associate higher prices with better quality
But in practice, firms do not disclose product quality very often, even when there are relatively cost-effective mechanisms for credible disclosure and even when the product quality itself is not bad.

For example, empirical studies find that hospitals often do not disclose risk-adjusted mortality; schools often do not report standardized test scores; restaurants almost never disclose hygiene inspection reports; and so on.

In fact, the reluctance of firms to disclose voluntarily may discourage the emergence of rating agencies and certification intermediaries in many industries. This study provides a new explanation for why firms do not wish to disclose quality.

The researchers’ explanation is based on the commonplace observation that even when there is no hard and credible information about products on the market, buyers often associate higher prices with better quality and cheap products with low quality.

Such beliefs held by buyers are rational in markets where firms anticipate this and choose their actions (such as prices) to convey the hidden information. Economists call this “signaling”: it is an alternative way of communicating private information by firms.

The researchers argue that firms may not disclose product attributes voluntarily because they find it more profitable to signal their information indirectly.

Excessively high price makes it credible to buyers that product could not be low quality
This is somewhat paradoxical at first glance. Economists have long maintained that signalling is costly for firms. For example, to signal high quality through high prices, a firm may have to charge a much higher price than in a situation where product quality was observed or disclosed, leading to loss of sales and profit. The excessively high price is needed to make it credible to buyers that this could not be a low quality product as the producer of such a product would have lower costs and therefore prefer to sell high volume at low price.

Why then would a firm prefer to signal rather than disclose? The answer lies in the strategic behavior of firms and market competition. The researchers show that when firms compete on price, not disclosing product quality voluntarily, competing under a “veil of incomplete information” can soften competition, leading to higher profits and a more collusive outcome.

Firms’ incentives to lower prices to steal business from their rivals are disciplined by the fact that buyers may associate lower prices with lower quality. The resulting market outcome can be one with higher profits for the nondisclosing firm. The strategic incentive for nondisclosure may be strong even when a firm has a strong competitive advantage in the market.

Absence of voluntary disclosure does not mean that consumers make uninformed decisions
In contrast with previous research on this issue, the new explanation of nondisclosure is not based on disclosure being too costly or imperfect. The researchers show that no firm may disclose product quality (including the ones with the best product quality), even if the mechanism for voluntary disclosure is almost costless and frictionless.

The researchers’ analysis indicates that the absence of voluntary disclosure does not mean that consumers make uninformed decisions; nondisclosure arises precisely when buyers infer quality from the market behavior of firms.

But markets may well be inefficient as the prices that are set to signal quality distort actual buying decisions. This leads to the important policy implication that there may be a case for imposing mandatory disclosure regulation on firms. — Royal Economic Society and Southern Methodist University

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