SFB 303 Discussion Paper No. A-463

Author: Kessler, Anke S.

Title: The Value of Ignorance

Abstract: The objective of this paper is to endogenize the information structure of an agent in a standard model of adverse selection. Before contracting takes place, the agent has the opportunity to choose among different information technologies in order to gather information on the future state of nature. I allow for the possibility that, when using a certain technology, the agent is ignorant ( remains uniformed about the state of nature during the entire game ) with some probability. The agent's optimal choice of information structure is derived and it is shown that in the case of 2 states of nature, the possibility of remaining ignorant has a strictly positive strategic value for the agent for a wide range of information technologies. In such a case, there will be no equilibrium in which the agent is perfectly informed even if additional information is costless.

Keywords: Information Acquisition, Contracts, Adverse Selection

JEL-Classification-Number: D82, D83

Creation-Date: April 1995
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