(Non)exclusive Contracting under Adverse Selection: An Expirement

(Non)exclusive Contracting under Adverse Selection: An Experiment

The performance of markets with hidden information is of central importance in microeconomic theory. We present the results of a comprehensive experiment that distinguishes between the two fundamental forms of hidden information, private and common values, in different contracting environments. Contracting environments vary in terms of the market power that the screening market side has over the trades of its privately informed customers, ranging from monopoly to nonexclusive competition. Nonexclusivity of contracts is a reality in many important markets with information problems such as life insurance and health insurance markets. The degree of equilibrium play we find is striking, particularly in the complex cases of common values. Under private values, competition ensures efficient trades. Under common values, low-type buyers are to a large extent excluded under nonexclusive competition, whereas such types’ trades are only distorted under exclusive competition. This leads to a significantly higher market surplus under exclusive competition in comparison to nonexclusive competition under common values.