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Optimal Contracting with Verifiable Ex Post Signals

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Author Info

  • Anke Kessler
  • Christoph Lülfesmann
  • Patrick Schmitz

Abstract

We study an adverse selection problem in which information that is imperfectly correlated with the agent's type becomes public ex post. Unbounded penalties are ruled out by assuming that the agent is wealth constrained. The following conclusions emerge. If the agent's utility is increasing in the contractual action (e.g. the quantity traded), the downward distortion in bad states may be strengthened. Hence, ex post information can reduce efficiency. In contrast, if the agent's utility is decreasing in the action level, there may be an upward distortion. Moreover, his rent may increase due to the ex post signal about his type. The qualitative results thus differ substantially depending on the specific situation under consideration, e.g., whether the agent is in a `buyer' or `seller' position. In both cases, however, additional information need not improve the efficiency of the relationship.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse19_2000.pdf
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse19_2000.

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Length: 21
Date of creation: Oct 2000
Date of revision:
Handle: RePEc:bon:bonedp:bgse19_2000

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

Related research

Keywords: Adverse Selection; Ex Post Information; Wealth Constraints; Upward Distortion;

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Cited by:
  1. R. Gary-Bobo & Y. Spiegel, 2003. "Optimal state-contingent regulation under limited liability," THEMA Working Papers 2003-09, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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