Working Paper: CEPR ID: DP6988
Authors: Patrick W. Schmitz
Abstract: In a complete contracting model, a risk-neutral seller exerts effort while producing a good. Effort is a hidden action and stochastically influences the risk-neutral buyer's valuation. Then the buyer can gather private information about his valuation. The ex ante optimal contract may encourage information gathering, even though it is commonly known that it is ex post efficient to trade regardless of the buyer's valuation (so that information gathering is a strategic, unproductive rent-seeking activity). Information gathering occurs even more often if it is a verifiable action.
Keywords: Complete contracting; Holdup problem; Information gathering
JEL Codes: D82; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contract structure (L14) | buyer behavior (D19) |
| seller's unobservable effort (D29) | buyer information gathering (R21) |
| low costs of seller effort and buyer information gathering (L81) | buyer information gathering (R21) |
| buyer information gathering is verifiable (L85) | information gathering (C80) |
| contract structure (L14) | seller effort (L85) |