DP7252 Gathering Information before Signing a Contract: Experimental Evidence
|Author(s):||Eva I Hoppe, 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.