Optimal Contracting with Verifiable Ex Post Signals

Arbeitspapier

We study an adverse selection problem in which information that is imperfectly correlated with the agent's type becomes public ex post. Unbounded penalties are ruled out by assuming that the agent is wealth constrained. The following conclusions emerge. If the agent's utility is increasing in the contractual action (e.g. the quantity traded), the downward distortion in bad states may be strengthened. Hence, ex post information can reduce efficiency. In contrast, if the agent's utility is decreasing in the action level, there may be an upward distortion. Moreover, his rent may increase due to the ex post signal about his type. The qualitative results thus differ substantially depending on the specific situation under consideration, e.g., whether the agent is in a `buyer' or `seller' position. In both cases, however, additional information need not improve the efficiency of the relationship.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bonn Econ Discussion Papers ; No. 19/2000

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design
• Subject: Adverse Selection ; Ex Post Information ; Wealth Constraints ; Upward Distortion

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kessler, Anke ; Lülfesmann, Christoph ; Schmitz, Patrick
• Event: Veröffentlichung
• (who): University of Bonn, Bonn Graduate School of Economics (BGSE)
• (where): Bonn
• (when): 2000

Further information

• Handle: http://hdl.handle.net/10419/78389
• Last update: 10.03.2025, 11:43 AM CET