Ex Ante Information in Adverse Selection
11 Pages Posted: 11 Jun 2010 Last revised: 29 Mar 2011
Date Written: March 8, 2011
This paper studies the effects of the signal available before a standard Baron-Myerson contracting takes place. It shows that, while the principal's profits increase with the quality of the signal, the agent's rent also increases if the signal concerns the realizations where the principal is optimistic about the agent's type. When the signal concerns the realizations where the principal is pessimistic about the agent's type, the social welfare decreases.
Keywords: Information, Adverse Selection
JEL Classification: D82, D83
Suggested Citation: Suggested Citation