Strategic contracting in the cultural industry: A Bayesian game theory and Shannon information approach

Abstract

In the cultural industry, firms face significant challenges when contracting with artists due to the inherently unpredictable quality of experience goods. This study investigates how firms can leverage indices, as introduced by Spence, to make more informed contracting decisions under such uncertainty. By framing the problem as a sequential Bayesian game and applying Shannon information theory, it is demonstrated that indices — observable and unalterable attributes correlated with artistic quality — serve as reliable predictors in the artist selection process. The analysis reveals that when the cost of forging indices exceeds a certain threshold, artists are disincentivised from manipulation, allowing firms to avoid contracting with low-quality producers. This framework offers a robust solution to the contracting dilemma within the cultural industry and provides valuable insights for other markets characterised by high uncertainty and the unpredictability of experience goods.

Keywords

• Experience goods
• Index
• Information theory
• Shannon information
• Sequential Bayesian game