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Contracting under adverse selection: Certifiable vs. uncertifiable information

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  • Schmitz, Patrick W.

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.

Suggested Citation

  • Schmitz, Patrick W., 2021. "Contracting under adverse selection: Certifiable vs. uncertifiable information," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 100-112.
    • Handle: RePEc:eee:jeborg:v:182:y:2021:i:c:p:100-112
    DOI: 10.1016/j.jebo.2020.11.038
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    Cited by:

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    4. Kym Pram, 2023. "Learning And Evidence In Insurance Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1685-1714, November.

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    More about this item

    Keywords

    Contracting; Asymmetric information; Adverse selection; Screening; Information gathering;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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