DP15514 Contracting under Adverse Selection: Certifiable vs. Uncertifiable Information
|Author(s):||Patrick W. Schmitz|
|Publication Date:||December 2020|
|Keyword(s):||Adverse Selection, asymmetric information, Contracting, Information gathering, screening|
|JEL(s):||C73, D23, D82, D86, L24|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15514|
The analysis of adverse selection problems in seller-buyer relationships has typically been based on the assumption that private information is uncertifiable, while in practice it may well be certifiable. If a buyer has certifiable private information, he can conceal evidence, but he cannot claim to have information for which he has no evidence, so he has fewer possibilities to misrepresent his information. Nevertheless, we find that the expected total surplus can be strictly smaller in the case of certifiable information than in the case of uncertifiable information. This finding holds when the buyer may have private information with some exogenous probability as well as in the case of opportunistic information gathering, where the buyer can privately decide whether or not to acquire information for strategic reasons.