Gathering Information before Signing a Contract: Experimental Evidence

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Gathering Information before Signing a Contract: Experimental Evidence

Author Info

Hoppe, Eva I.
Schmitz, Patrick W.

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Patrick W. Schmitz

Abstract

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7252.

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Date of creation: Apr 2009
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Handle: RePEc:cpr:ceprdp:7252

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-04-25 (All new papers)
NEP-CTA-2009-04-25 (Contract Theory & Applications)
NEP-EXP-2009-04-25 (Experimental Economics)
NEP-GTH-2009-04-25 (Game Theory)

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Other versions:
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