Contracting under Adverse Selection: Certifiable vs. Uncertifiable Information

Schmitz, Patrick W. (2021): Contracting under Adverse Selection: Certifiable vs. Uncertifiable Information. Published in: Journal of Economic Behavior and Organization , Vol. 182, (2021): pp. 100-112.

Abstract

The analysis of adverse selection problems in seller-buyer relationships has typically been based on the assumption that private information is uncertifiable, while in practice it may well be certifiable. If a buyer has certifiable private information, he can conceal evidence, but he cannot claim to have information for which he has no evidence, so he has fewer possibilities to misrepresent his information. Nevertheless, we find that the expected total surplus can be strictly smaller in the case of certifiable information than in the case of uncertifiable information. This finding holds when the buyer may have private information with some exogenous probability as well as in the case of opportunistic information gathering, where the buyer can privately decide whether or not to acquire information for strategic reasons.

• Item Type: MPRA Paper
• Language: English
• Keywords: Contracting; Asymmetric information; Adverse selection; Screening; Information gathering
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out ; Joint Ventures ; Technology Licensing; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M11 - Production Management; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing

References

Baron, D.P., Myerson, R.B., 1982. Regulating a monopolist with unknown costs. Econometrica 50, 911--930.

Bolton, P., Dewatripont, M., 2005. Contract Theory. MIT Press.

Buso, M., 2019. Bundling versus unbundling: Asymmetric information on information externalities. Journal of Economics 128, 1--25.

Carbonara, N., Pellegrino, R., 2020. The role of public private partnerships in fostering innovation. Construction Management and Economics 38, 140--156.

Crémer, J., Khalil, F., 1992. Gathering information before signing a contract. American Economic Review 82, 566--578.

Crémer, J., Khalil, F., Rochet, J.-C., 1998a. Strategic information gathering before a contract is offered. Journal of Economic Theory 81, 163--200.

Crémer, J., Khalil, F., Rochet, J.-C., 1998b. Contracts and productive information gathering. Games and Economic Behavior 25, 174--193.

Goldlücke, S., Schmitz, P.W., 2014. Investments as signals of outside options. Journal of Economic Theory 150, 683--708.

Goltsman, M., 2011. Optimal information transmission in a holdup problem. Rand Journal of Economics 42, 495--526.

Green, J.R., Laffont, J.-J., 1986. Partially verifiable information and mechanism design. Review of Economic Studies 53, 447--456.

Grossman, S.J., Hart, O.D., 1980. Disclosure laws and takeover bids. Journal of Finance 35, 323--334.

Grossman, S.J., Hart, O.D., 1986. The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy 94, 691--719.

Hart, O.D., 1995. Firms, Contracts and Financial Structure. Oxford: Oxford University Press.

Hart, O., Holmström, B., 1987. The theory of contracts. In: Bewley, T. (ed.), Advances in Economics and Econometrics, Econometric Society Monographs, Fifth World Congress. Cambridge: Cambridge University Press, 71--155.

Hart, O.D., Moore, J., 1990. Property rights and the nature of the firm. Journal of Political Economy 98, 1119--1158.

Hoppe, E.I., 2013. Observability of information acquisition in agency models. Economics Letters 119, 104--107.

Hoppe, E.I. and Schmitz, P.W., 2010. The costs and benefits of additional information in agency models with endogenous information structures. Economics Letters 107, 58--62.

Hoppe, E.I. and Schmitz, P.W., 2013a, Public-private partnerships versus traditional procurement: Innovation incentives and information gathering, Rand Journal of Economics 44, 56--74.

Hoppe, E.I., Schmitz, P.W., 2013b. Contracting under incomplete information and social preferences: An experimental study. Review of Economic Studies 80, 1516--1544.

Iossa, E., Martimort, D., 2015. Pessimistic information gathering. Games and Economic Behavior 91, 75--96.

Kessler, A.S., 1998. The value of ignorance. Rand Journal of Economics 29, 339--354.

Laffont, J.-J., Martimort, D., 1999. Separation of regulators against collusive behavior. Rand Journal of Economics 30, 232--262.

Laffont, J.-J., Martimort, D., 2002. The Theory of Incentives. Princeton University Press.

Lewis, T.R., Sappington, D.E., 1993. Ignorance in agency problems. Journal of Economic Theory 61, 169--183.

Lewis, T.R., Sappington, D.E., 1997. Information management in incentive problems. Journal of Political Economy 105, 796--821.

Maskin, E., Riley, J., 1984. Monopoly with incomplete information. Rand Journal of Economics 15, 171--196.

Milgrom, P.R., 1981. Good news and bad news: Representation theorems and applications. Bell Journal of Economics 12, 380--391.

Mori, Y., 2017. A formal model of firm boundaries and haggling. Economics Letters 156, 15--17.

Mori, Y., 2020. Ex ante investment, ex post adaptation, and joint ownership. Economics Letters 187, 108927.

Myerson, R.B., 1982. Optimal coordination mechanisms in generalized principal--agent problems. Journal of Mathematical Economics 10, 67--81.

Okuno-Fujiwara, M., Postlewaite, A., Suzumura, K., 1990. Strategic information revelation. Review of Economic Studies 57, 25--47.

Schmitz, P.W., 2006. Information gathering, transaction costs, and the property rights approach. American Economic Review 96, 422--434.

Schmitz, P.W., 2007. Optimal selling strategies when buyers may have hard information. European Economic Review 51, 859--870.

Schweizer, U., 2017. Incentives to acquire information under mandatory versus voluntary disclosure. Journal of Law, Economics, and Organization 33, 173--192.

Spranca, M., Minsk, E., Baron, J., 1991. Omission and commission in judgment and choice. Journal of Experimental Social Psychology 27, 76--105.

Su, A.P.-J., 2017a. Information acquisition and the equilibrium incentive problem. Journal of Economics and Management Strategy 26, 231--256.

Su, A.P.-J., 2017b. Information revelation in the property right theory of the firms. International Journal of Industrial Organization 52, 133--164.

Tirole, J., 1986. Hierarchies and bureaucracies: On the role of collusion in organizations. Journal of Law, Economics, and Organization 2, 181--214.

Townsend, R.M., 1979. Optimal contracts and competitive markets with costly state verification. Journal of Economic Theory 21, 265--293.

Williamson, O.E., 2000. The new institutional economics: Taking stock, looking ahead. Journal of Economic Literature 38, 595--613.

Williamson, O.E., 2002. The theory of the firm as governance structure: From choice to contract. Journal of Economic Perspectives 16, 171--195.

Ye, B. and Li, S., 2018. Competitive contracts with productive information gathering. Journal of Economics 124, 1--17.