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Hidden information, bargaining power, and efficiency: an experiment

Published online by Cambridge University Press:  14 March 2025

Antonio Cabrales ,
Gary Charness  and
Marie Claire Villeval
Antonio Cabrales*
Affiliation:
Universidad Carlos III de Madrid, Madrid, Spain
Gary Charness*
Affiliation:
University of California at Santa Barbara, Santa Barbara, USA
Marie Claire Villeval*
Affiliation:
University of Lyon, CNRS, Lyon 69007, France
*
e-mail: [email protected]
e-mail: [email protected]
e-mail: [email protected]
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Abstract

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We devise an experiment to explore the effect of different degrees of bargaining power on the design and the selection of contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how different ratios of principals and agents affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies may disappear, but they are insensitive to the number of principals. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.

Keywords

ExperimentHidden informationBargaining powerCompetitionEfficiency

JEL classification

D21: Firm Behavior: Theory A13: Relation of Economics to Social Values J41: Labor Contracts B49: Other C91: Laboratory, Individual Behavior C92: Laboratory, Group Behavior
Type
Research Article
Information
Experimental Economics , Volume 14 , Issue 2 , May 2011 , pp. 133 - 159
Creative Commons
Creative Common License - CCCreative Common License - BYCreative Common License - NC
This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
Copyright
Copyright © The Author(s) 2010

Footnotes

Electronic supplementary material The online version of this article (doi: 10.1007/s10683-010-9260-6) contains supplementary material, which is available to authorized users.

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