Eva I. Hoppe and Patrick W. Schmitz
Games and Economic Behavior, Vol. 89, 2015, 17-33.
Abstract. In the basic adverse selection model, a seller makes a take-it-or-leave-it 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, the total surplus level is not different from the symmetric information benchmark, while in the bad state of nature, private information may reduce the total surplus. We have conducted a laboratory experiment with 954 participants to test these hypotheses. The results are largely in agreement with the theoretical predictions. However, we also find that private information may increase the total surplus in the good state of nature. This finding is in line with the contract-theoretic predictions once we take into account that standard theory is too optimistic about the efficiency level attained under symmetric information.
The working paper version is available for download (CEPR Discussion Paper 9510).