Gathering Information before Signing a Contract: Experimental Evidence

Patrick Schmitz and Eva Hoppe

No 7252, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Adverse selection; Agency theory; Experiment; Information gathering (search for similar items in EconPapers)
JEL-codes: C72 C91 D82 D86 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-cta, nep-exp and nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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