Discussion paper

DP7252 Gathering Information before Signing a Contract: Experimental Evidence

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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Citation

Schmitz, P and E Hoppe-Fischer (2009), ‘DP7252 Gathering Information before Signing a Contract: Experimental Evidence‘, CEPR Discussion Paper No. 7252. CEPR Press, Paris & London. https://cepr.org/publications/dp7252