The Good, The Bad and The Complex: Product Design with Imperfect Information

Abstract

This paper explores the incentives of product designers to complexify products, and the resulting implications for overall product quality. In our model, a consumer can accept or reject a product proposed by a designer, who can affect the quality and the complexity of the product. While the product’s quality determines the direct benefits of the product to the consumer, the product’s complexity affects the information a Bayesian consumer can extract about the product’s quality. Examples include policymakers who propose policies for approval by voters, or banks that design financial products that they later offer to retail investors. We find that complexity is not necessarily a feature of low quality products. For example, while an increase in alignment between the consumer 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 can help rationalize the observed trends in quality and complexity of regulatory policies and financial products.