IDEAS home Printed from https://ideas.repec.org/a/kap/expeco/v14y2011i2p133-159.html
   My bibliography  Save this article

Hidden information, bargaining power, and efficiency: an experiment

Author

Listed:
  • Antonio Cabrales

    ()

  • Gary Charness

    ()

  • Marie Villeval

    ()

Abstract

We devise an experiment to explore the effect of different degrees of bargaining power on the design and the selection of 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 different ratios of principals and agents 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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Antonio Cabrales & Gary Charness & Marie Villeval, 2011. "Hidden information, bargaining power, and efficiency: an experiment," Experimental Economics, Springer;Economic Science Association, vol. 14(2), pages 133-159, May.
  • Handle: RePEc:kap:expeco:v:14:y:2011:i:2:p:133-159
    DOI: 10.1007/s10683-010-9260-6
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10683-010-9260-6
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dionne, Georges & Doherty, Neil A, 1994. "Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 209-235, April.
    2. Kanemoto, Yoshitsugu & MacLeod, W Bentley, 1992. "The Ratchet Effect and the Market for Secondhand Workers," Journal of Labor Economics, University of Chicago Press, vol. 10(1), pages 85-98, January.
    3. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences with Simple Tests," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 817-869.
    4. Chaudhuri, Ananish, 1998. "The ratchet principle in a principal agent game with unknown costs: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 291-304, November.
    5. Puelz, Robert & Snow, Arthur, 1994. "Evidence on Adverse Selection: Equilibrium Signaling and Cross-Subsidization in the Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 236-257, April.
    6. Gary Charness & Peter Kuhn & Marie Claire Villeval, 2011. "Competition and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 29(3), pages 513-547.
    7. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
    8. Fischbacher, Urs & Fong, Christina M. & Fehr, Ernst, 2009. "Fairness, errors and the power of competition," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 527-545, October.
    9. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    10. Banks Jeffrey & Camerer Colin & Porter David, 1994. "An Experimental Analysis of Nash Refinements in Signaling Games," Games and Economic Behavior, Elsevier, vol. 6(1), pages 1-31, January.
    11. Gary Charness & Peter Kuhn & Marie Claire Villeval, 2011. "Competition and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 29(3), pages 513-547.
    12. repec:bla:joares:v:23:y:1985:i::p:81-120 is not listed on IDEAS
    13. Keser, Claudia & Willinger, Marc, 2000. "Principals' principles when agents' actions are hidden," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 163-185, January.
    14. Cabrales, Antonio & Charness, Gary, 2011. "Optimal contracts with team production and hidden information: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 77(2), pages 163-176, February.
    15. Jordi Brandts & Gary Charness, 2004. "Do Labour Market Conditions Affect Gift Exchange? Some Experimental Evidence," Economic Journal, Royal Economic Society, vol. 114(497), pages 684-708, July.
    16. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, vol. 87(3), pages 314-341, June.
    17. Gary Charness & Martin Dufwenberg, 2006. "Promises and Partnership," Econometrica, Econometric Society, vol. 74(6), pages 1579-1601, November.
    18. Pierre André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory: A Survey of Some Recent Work," CESifo Working Paper Series 738, CESifo Group Munich.
    19. Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer;Economic Science Association, vol. 5(1), pages 5-27, June.
    20. Holt, Charles A & Sherman, Roger, 1990. "Advertising and Product Quality in Posted-Offer Experiments," Economic Inquiry, Western Economic Association International, vol. 28(1), pages 39-56, January.
    21. Pierre-Andre Chiappori & Bernard Salanie, 2000. "Testing for Asymmetric Information in Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 56-78, February.
    22. Brandts, Jordi & Holt, Charles A, 1992. "An Experimental Test of Equilibrium Dominance in Signaling Games," American Economic Review, American Economic Association, vol. 82(5), pages 1350-1365, December.
    23. Edward P. Lazear, 1999. "Personnel Economics: Past Lessons and Future Directions," NBER Working Papers 6957, National Bureau of Economic Research, Inc.
    24. Gary Charness & Peter Kuhn & Marie Claire Villeval, 2011. "Competition and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 29(3), pages 513-547.
    25. Gary Charness & Peter Kuhn & Marie Claire Villeval, 2011. "Competition and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 29(3), pages 513-547.
    26. Brit Grosskopf, 2003. "Reinforcement and Directional Learning in the Ultimatum Game with Responder Competition," Experimental Economics, Springer;Economic Science Association, vol. 6(2), pages 141-158, October.
    27. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
    28. Roth, Alvin E. & Vesna Prasnikar & Masahiro Okuno-Fujiwara & Shmuel Zamir, 1991. "Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study," American Economic Review, American Economic Association, vol. 81(5), pages 1068-1095, December.
    29. David J. Cooper, 1999. "Gaming against Managers in Incentive Systems: Experimental Results with Chinese Students and Chinese Managers," American Economic Review, American Economic Association, vol. 89(4), pages 781-804, September.
    30. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
    31. Miller, Ross M & Plott, Charles R, 1985. "Product Quality Signaling in Experimental Markets," Econometrica, Econometric Society, vol. 53(4), pages 837-872, July.
    32. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    33. Lazear, Edward P, 1999. "Personnel Economics: Past Lessons and Future Directions: Presidential Address to the Society of Labor Economists, San Francisco, May 1, 1998," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 199-236, April.
    34. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    35. Dahlby, B. G., 1983. "Adverse selection and statistical discrimination : An analysis of Canadian automobile insurance," Journal of Public Economics, Elsevier, vol. 20(1), pages 121-130, February.
    36. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, January.
    37. Gary Charness & Peter Kuhn & Marie Claire Villeval, 2011. "Competition and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 29(3), pages 513-547.
    38. Genesove, David, 1993. "Adverse Selection in the Wholesale Used Car Market," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 644-665, August.
    39. Fehr, Ernst, et al, 1998. "When Social Norms Overpower Competition: Gift Exchange in Experimental Labor Markets," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 324-351, April.
    40. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    41. Davis Douglas D. & Holt Charles A., 1994. "Equilibrium Cooperation in Three-Person, Choice-of-Partner Games," Games and Economic Behavior, Elsevier, vol. 7(1), pages 39-53, July.
    42. H. Peyton Young & Mary A. Burke, 2001. "Competition and Custom in Economic Contracts: A Case Study of Illinois Agriculture," American Economic Review, American Economic Association, vol. 91(3), pages 559-573, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Grimm, Veronika & Mengel, Friederike, 2011. "Matching technology and the choice of punishment institutions in a prisoner's dilemma game," Journal of Economic Behavior & Organization, Elsevier, vol. 78(3), pages 333-348, May.
    2. repec:eee:joepsy:v:62:y:2017:i:c:p:231-245 is not listed on IDEAS
    3. Palermo, Alberto, 2016. "Hold-up in vertical hierarchies with adverse selection," Economics Letters, Elsevier, vol. 148(C), pages 91-95.
    4. Hoppe, Eva I. & Schmitz, Patrick W., 2015. "Do sellers offer menus of contracts to separate buyer types? An experimental test of adverse selection theory," Games and Economic Behavior, Elsevier, vol. 89(C), pages 17-33.
    5. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1516-1544.
    6. Buckert, Magdalena & Schwieren, Christiane & Kudielka, Brigitte M. & Fiebach , Christian J., 2015. "How stressful are economic competitions in the lab? An investigation with physiological measures," Working Papers 0593, University of Heidelberg, Department of Economics.

    More about this item

    Keywords

    Experiment; Hidden information; Bargaining power; Competition; Efficiency; A13; B49; C91; C92; D21; J41;

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:expeco:v:14:y:2011:i:2:p:133-159. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.