Endogenous Punishments in Agency with Verifiable Ex Post Information

25 Pages Posted: 7 Nov 2005

See all articles by Anke S. Kessler

Anke S. Kessler

Simon Fraser University (SFU) - Department of Economics; University of Bonn - Economic Science Area; Centre for Economic Policy Research (CEPR)

Christoph Lülfesmann

University of Bonn - Economic Science Area; Simon Fraser University (SFU) - Department of Economics

Patrick W. Schmitz

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

Abstract

The article studies an adverse selection model in which a contractible, imperfect signal on the agent's type is revealed ex post. The agent is wealth constrained, which implies that the maximum penalty depends on the contracted transaction (e.g., the volume of trade). First, we show that the qualitative effects of the signal can be unambiguously tied to the nature of the problem (e.g., whether the agent is in a "buyer" or a "seller" position). Second, the distortions caused by informational asymmetries may become more severe although more information is now available. Finally, the signal can actually serve to increase the agent's informational rents.

Suggested Citation

Kessler, Anke S. and Lülfesmann, Christoph and Schmitz, Patrick W., Endogenous Punishments in Agency with Verifiable Ex Post Information. International Economic Review, Vol. 46, No. 4, pp. 1207-1231, November 2005. Available at SSRN: https://ssrn.com/abstract=825177

Anke S. Kessler

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604-291-3443 (Phone)
604-291-5944 (Fax)

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49 228 739 246 (Phone)
+49 228 739 221 (Fax)

HOME PAGE: http://www.wipol.uni-bonn.de/~kessler/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Christoph Lülfesmann (Contact Author)

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49 228 737 939 (Phone)
+49 228 739 239 (Fax)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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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