Competition, hidden information, and efficiency : an experiment

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dc.contributor.author Cabrales, Antonio
dc.contributor.author Charness, Gary
dc.contributor.author Villeval, Marie Claire
dc.contributor.editor Universidad Carlos III de Madrid. Departamento de Economía
dc.date.accessioned 2007-04-02T08:32:48Z
dc.date.available 2007-04-02T08:32:48Z
dc.date.issued 2006-09
dc.identifier.issn 2340-5031
dc.identifier.uri http://hdl.handle.net/10016/678
dc.description.abstract We devise an experiment to explore the effect of different degrees of competition on optimal contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how these different degrees of competition affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies remain. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.
dc.format.extent 605512 bytes
dc.format.mimetype application/pdf
dc.language.iso eng
dc.language.iso eng
dc.relation.ispartofseries UC3M Working papers. Economics;
dc.relation.ispartofseries 07-09
dc.rights Atribución-NoComercial-SinDerivadas 3.0 España
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.other Experiment
dc.subject.other Hidden information
dc.subject.other Competition
dc.subject.other Efficiency
dc.title Competition, hidden information, and efficiency : an experiment
dc.type workingPaper
dc.subject.eciencia Economía
dc.rights.accessRights openAccess
dc.identifier.repec we071909
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