Bonding and Nonbonding Signals of Product Quality

Abstract

This article examines the essential role of bonding in most signaling models where quality is subject to moral hazard problems. An advertising model, in which advertising is a durable asset whose value is reduced by cheating, illustrates how the bonding capacity of a signal determines its cost. Characteristics of the market that govern how well a signal is targeted to relevant consumers and how information about cheating is spread are critical to determining bonding capacity and, hence, to the choice among potential signals. This bonding perspective explains the literature's widely divergent predictions about the conditions necessary for quality signals. Copyright 1990 by the University of Chicago.

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