Gathering Information Before Signing a Contract: Experimental Evidence

25 Pages Posted: 1 Apr 2009 Last revised: 17 Jul 2009

See all articles by Eva I. Hoppe

Eva I. Hoppe

University of Cologne - Department of Economics

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2009

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: Agency theory, adverse selection, information gathering, experiment

JEL Classification: D82, D86, C72, C91

Suggested Citation

Hoppe, Eva I. and Schmitz, Patrick W., Gathering Information Before Signing a Contract: Experimental Evidence (July 2009). Available at SSRN: https://ssrn.com/abstract=1371047 or http://dx.doi.org/10.2139/ssrn.1371047

Eva I. Hoppe

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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