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Title: Gathering Information before Signing a Contract: Experimental Evidence

Author(s): Eva I Hoppe-Fischer and Patrick W. Schmitz

Publication Date: April 2009

Keyword(s): adverse selection, agency theory, experiment and information gathering

Programme Area(s): Industrial Organization

Abstract: A central insight of agency theory is that when a principal offers a contract to a privately informed agent, the principal trades off ex post efficiency in the bad state of nature against a larger profit in the good state of nature. We report about an experiment with 508 participants designed to test whether this fundamental trade-off is actually relevant. In particular, we investigate settings with both exogenous and endogenous information structures. We find that theory is indeed a useful predictor for the relative magnitudes of the principals' offers, the agents' information gathering decisions, and the occurrence of ex post inefficiencies.

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Bibliographic Reference

Hoppe-Fischer, E and Schmitz, P. 2009. 'Gathering Information before Signing a Contract: Experimental Evidence'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7252