Observability of information acquisition in agency models

We consider an adverse selection model in which the agent can gather private information before the principal offers the contract. In scenario I, information gathering is a hidden action, while in scenario II, it is observable. We study how the two scenarios differ. Specifically, the principal may be better off when information gathering is a hidden action.

► We consider an adverse selection model. ► The agent can gather private information before the principal offers the contract. ► In scenario I, information gathering is a hidden action. ► In scenario II, the principal observes the agent's information gathering decision. ► We compare the two scenarios. The principal may be better off in scenario I.