Experimental Evidence of Pooling Outcomes Under Information Asymmetry

Operational decisions under information asymmetry can signal a firm’s prospects to lessinformed parties, such as investors, customers, competitors, and regulators. Consequently, managers in these settings often face a tradeoff between making an optimal decision and sending a favorable signal. We provide experimental evidence on the choices made by decision makers in such settings. Equilibrium assumptions that are commonly applied to analyze these situations yield the least cost separating outcome as the unique equilibrium. In this equilibrium, the more informed party undertakes a costly signal to resolve the information asymmetry that exists. We provide evidence, however, that participants are much more likely to pursue a pooling outcome when such an outcome is available. This result is important for research and practice because pooling and separating outcomes can yield dramatically different results and have divergent implications. We find evidence that the choice to pool is influenced by changes in the underlying newsvendor model parameters in our setting. In robustness tests, we show that choosing a pooling outcome is especially pronounced among participants who report a high level of understanding of the setting and that participants who pool are rewarded by the less informed party with higher payoffs. Finally, we demonstrate through a reexamination of Lai et al. (2012) and Cachon and Lariviere (2001) how pooling outcomes can substantively extend the implications of other extant signaling game models in the operations management literature. ∗The Johnson School, Cornell University, Sage Hall, Ithaca NY 14853. E-mail: [email protected]. †Harvard Business School, Soldiers Field Park, Boston MA 02163. E-mail: [email protected].