Working Paper: CEPR ID: DP9510
Authors: Eva I. Hoppe; Patrick W. Schmitz
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 Codes: C72; C92; D82; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private information (D82) | seller behavior (D21) |
| private information (D82) | incentive-compatible menus of contracts (D86) |
| private information (D82) | total surplus (D46) |
| private information (D82) | welfare enhancement (I38) |