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ENDOGENOUS PUNISHMENTS IN AGENCY WITH VERIFIABLE EX POST INFORMATION*
Author(s) -
Kessler Anke S.,
Lülfesmann Christoph,
W. Schmitz Patrick
Publication year - 2005
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2005.00365.x
Subject(s) - adverse selection , agency (philosophy) , verifiable secret sharing , ex ante , contractible space , information asymmetry , economics , database transaction , microeconomics , position (finance) , imperfect , signal (programming language) , computer science , mathematics , keynesian economics , philosophy , linguistics , epistemology , set (abstract data type) , finance , combinatorics , programming language
The article studies an adverse selection model in which a contractible, imperfect signal on the agent's type is revealed ex post. The agent is wealth constrained, which implies that the maximum penalty depends on the contracted transaction (e.g., the volume of trade). First, we show that the qualitative effects of the signal can be unambiguously tied to the nature of the problem (e.g., whether the agent is in a “buyer” or a “seller” position). Second, the distortions caused by informational asymmetries may become more severe although more information is now available. Finally, the signal can actually serve to increase the agent's informational rents.