Work

Do sellers offer menus of contracts to separate buyer types? An experimental test of adverse selection theory

Year: 2014

Type: article

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.

Source: Games and Economic Behavior

DOI: 10.1016/j.geb.2014.11.001

Authors: Eva I. Hoppe, Patrick W. Schmitz

Institutions: University of Bonn, University of Cologne, Centre for Economic Policy Research

Language: English

Topic: Experimental Behavioral Economics Studies

Subfield: Safety Research

Field: Social Sciences

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $2,720

OpenAlex ID: W2247201515

FWCI: 1.862

Cites: 52

Cited by: 24

Related to: 10