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Competition, hidden information, and efficiency : an experiment Author info | Abstract | Publisher info | Download info | Related research | Statistics Antonio Cabrales
Gary Charness
Marie-Claire Villeval
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We devise an experiment to explore the effect of different degrees of competition on optimal contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how these different degrees of competition affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies remain. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.
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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number
we071909.
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Paper Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2006.
"Competition, Hidden Information, and Efficiency: an Experiment ,"
Working Papers
0605, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
[Downloadable!] Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2006.
"Competition, Hidden Information and Efficiency: An Experiment ,"
IZA Discussion Papers
2296, Institute for the Study of Labor (IZA).
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