This thesis reviews and extends several results stemming from recent developments in the theory of market equilibrium in the presence of asymmetrically-distributed information. Chapters 1 and 2 consider the suggestion that the choice of a firm's financial structure may impart "inside" information about the firm's future return stream to outsider investors. It is found that the formal models of such "incentive signaling" make a strong implicit assumption about the result of the information transfer process; weakening this assumption is shown to disrupt the ability of a wide class of incentive mechanisms to support equilibrium outcomes.
In a related literature, an information-transmitting capacity has also been advanced as a major reason for the existence of warranties on consumer products. One important criticism of this view is that consumer product markets are often characterized by imperfect search, the presence of which might be expected to dilute the effectiveness of warranties as signals of a product's underlying quality. Chapter 3 employs an equilibrium nonsequential search model to demonstrate that the information content of a warranty as a proxy for product quality is not disrupted by the presence of imperfect search; the conditions that underlie signaling equilibria in perfect markets continue to uphold equilibria in markets with imperfect search. However, when information on product quality is transmitted via warranties in such markets, subtle welfare effects come into play depending upon, inter alia, consumers' inherent willingness to pay for warranties. Some of these effects imply surprising conclusions. For example, it may be the case that competitive market outcomes are easier to support in a market where consumers have no ex ante information on product quality before they begin to search (with warranties supplying quality information,) than in a market where information about quality is perfect, but search is not. On the other hand, it is possible that all consumers could be made better off in a "search" world (i.e., where quality information is freely available,) but warranty signals persist in order that a "lemons" equilibrium can be avoided.
