Gathering Information before Signing a Contract

Abstract

After being offered a contract, an agent has the possibility to observe the state of nature. This enables him to refuse the contract in unfavorable states but burdens him with an observation cost. The authors show that the principal offers a contract in which the agent has no incentive to observe the state of nature and they explore its terms. Later, they show that the principal finds it profitable to organize competition between several agents, even though he has monopoly power and can push a single agent down to his reservation utility. Copyright 1992 by American Economic Association.

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