Do Sellers Offer Menus of Contracts to Separate Buyer Types? An Experimental Test of Adverse Selection Theory

Patrick Schmitz and Eva Hoppe

No 9510, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In the basic adverse selection model, a seller makes a contract offer to a privately informed buyer. A fundamental hypothesis of incentive theory is that the seller may want to offer a menu of contracts to separate the buyer types. In the good state of nature, total surplus is not different from the symmetric information benchmark, while in the bad state, private information may be welfare-reducing. We have conducted a laboratory experiment with 954 participants to test these hypotheses. While the results largely corroborate the theoretical predictions, we also find that private information may be welfare-enhancing in the good state.

Keywords: Incentive theory; Laboratory experiment; Mechanism design; Private information (search for similar items in EconPapers)
JEL-codes: C72 C92 D82 D86 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-cta, nep-exp and nep-gth
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Citations: View citations in EconPapers (4)

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Journal Article: Do sellers offer menus of contracts to separate buyer types? An experimental test of adverse selection theory (2015)
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