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

53 Pages Posted: 21 Jun 2013

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)

Date Written: June 2013

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

JEL Classification: C72, C92, D82, D86

Suggested Citation

Hoppe, Eva I. and Schmitz, Patrick W., Do Sellers Offer Menus of Contracts to Separate Buyer Types? An Experimental Test of Adverse Selection Theory (June 2013). CEPR Discussion Paper No. DP9510. Available at SSRN: https://ssrn.com/abstract=2282964

Eva I. Hoppe (Contact Author)

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

Patrick W. Schmitz

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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