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Information about the quality of producers or products has strategic value and affects economic decisions. But what happens in markets with informational gaps because quality is difficult to observe directly and objective criteria to make quality judgments are lacking? Quality that is indiscernible or indeterminate or latent means to a large extent that it remains unknown to all parties involved in the transaction or even thereafter. Signals – e.g., reviews, awards, prestigious affiliations, past sales – may act as observable persuaders and reduce uncertainty caused by informational imperfections. At the same time, signals may shape future perceptions buyers and intermediaries have about those producers, and this may lead to a competitive advantage for a select few. Effectively, even seemingly inconsequential rewards or benefits gained by being the subject of a signal may grant some producers access to opportunities not given to others. Such preferential treatment could lead to superior performance that could start self-reinforcing feedback mechanisms, which could result in persistent performance for some producers compared to the rest.
In the empirical setting of the primary market for contemporary visual art, the career trajectories of 1,590 visual artists from two prestigious art institutions in the Netherlands are studied. A multi-dimensional approach is taken in analyzing quantitative characteristics of signals and qualitative attributes of sources conveying those signals, and examining these effects on not only different categories of buyers and intermediaries but also in the context of the particular career phase of the producers. The empirical results show strong self-reinforcing processes governing competitive dynamics, offering a fine-grained understanding of a source of inequality in the distribution of success in this market where quality differentials among competing producers are imperfectly observable, information about their underlying quality is imperfect and/or incomplete and objective measures for evaluation are lacking.