Gathering Information Before Signing a Contract: Experimental Evidence
25 Pages Posted: 1 Apr 2009 Last revised: 17 Jul 2009
Date Written: July 2009
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: Agency theory, adverse selection, information gathering, experiment
JEL Classification: D82, D86, C72, C91
Suggested Citation: Suggested Citation