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Gathering Information before Signing a Contract: Experimental Evidence

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  • Hoppe, Eva I
  • Schmitz, Patrick W

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.

Suggested Citation

  • Hoppe, Eva I & Schmitz, Patrick W, 2009. "Gathering Information before Signing a Contract: Experimental Evidence," CEPR Discussion Papers 7252, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7252
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    References listed on IDEAS

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    Cited by:

    1. Bing Ye & Sanxi Li, 2018. "Competitive contracts with productive information gathering," Journal of Economics, Springer, vol. 124(1), pages 1-17, May.

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    More about this item

    Keywords

    adverse selection; agency theory; experiment; information gathering;
    All these keywords.

    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; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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