Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/78389
Authors: 
Kessler, Anke
Lülfesmann, Christoph
Schmitz, Patrick
Year of Publication: 
2000
Series/Report no.: 
Bonn Econ Discussion Papers 19/2000
Abstract: 
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.
Subjects: 
Adverse Selection
Ex Post Information
Wealth Constraints
Upward Distortion
JEL: 
D82
Document Type: 
Working Paper

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