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Endogenous Punishments In Agency With Verifiable Ex Post Information

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Author Info
Anke S. Kessler
Christoph Lülfesmann
Patrick W. Schmitz

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Abstract

The article studies an adverse selection model in which a contractible, imperfect signal on the agent's type is revealed ex post. The agent is wealth constrained, which implies that the maximum penalty depends on the contracted transaction (e.g., the volume of trade). First, we show that the qualitative effects of the signal can be unambiguously tied to the nature of the problem (e.g., whether the agent is in a "buyer" or a "seller" position). Second, the distortions caused by informational asymmetries may become more severe although more information is now available. Finally, the signal can actually serve to increase the agent's informational rents. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-2354.2005.00365.x
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Publisher Info
Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 46 (2005)
Issue (Month): 4 (November)
Pages: 1207-1231
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Handle: RePEc:ier:iecrev:v:46:y:2005:i:4:p:1207-1231

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  1. Schmitz, Patrick W., 2006. "Optimal Selling Strategies When Buyers May Have Hard Information," CEPR Discussion Papers 5747, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Schmitz, Patrick W., 2006. "Book Review of “Contract Theory” (Bolton and Dewatripont, 2005)," MPRA Paper 6977, University Library of Munich, Germany. [Downloadable!]
  3. Roland Strausz, 2005. "Interim Information in Long Term Contracts," Discussion Papers 40, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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