DP7252 Gathering Information before Signing a Contract: Experimental Evidence
Author(s): | Eva I Hoppe-Fischer, Patrick W. Schmitz |
Publication Date: | April 2009 |
Keyword(s): | adverse selection, agency theory, experiment, information gathering |
JEL(s): | C72, C91, D82, D86 |
Programme Areas: | Industrial Organization |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=7252 |
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.