Working Paper: CEPR ID: DP7252
Authors: Eva I. Hoppe; Patrick W. Schmitz
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: Adverse Selection; Agency Theory; Experiment; Information Gathering
JEL Codes: C72; C91; D82; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| information structure (exogenous vs. endogenous) (D83) | wage offers (J31) |
| information structure (L15) | efficiency of contract outcomes (D86) |
| information structure (L15) | information gathering (C80) |