UNVERIFIABLE QUALITIES AND THIRD PARTIES

抄録

This paper examines moral hazard problems where performance is unverifiable. In contrast to standard cases, traditional mechanisms fail to achieve the first best outcome if performance, the quality of the product here, is unverifiable.
This paper shows that, by using a third party, high quality products can be supplied under perfectly competitive prices and the first best outcome is achieved. Furthermore, the behavior of the third party which explained in this paper is consistent with the actual behavior of distributors. So we can conclude that distributors may contribute to assure the unverifiable qualities.
The mechanism explained here differs considerably from the traditional arguments concerning, for example, monitoring quality. Distributors do not have to observe levels of quality. The repeated game between producer and consumer, and the contract between producer and distributor both support this mechanism.