Eva I. Hoppe
Economics Letters, Vol. 119 (1), 2013, 104-107.
Abstract. We consider an adverse selection model in which the agent can gather private information before the principal offers the contract. There are two scenarios. In scenario I, information gathering is a hidden action, while in scenario II, the principal observes the agent`s information gathering decision. We study how the two scenarios differ with respect to the agent`s expected rent, the principal`s expected profit, and the expected total surplus. In particular, it turns out that the principal may be better off when the agent`s information gathering decision is a hidden action.
The working paper version is available for download at SSRN.