Moral Hazard with Counterfeit Signals
AbstractIn many moral hazard problems, the principal evaluates the agent's performance based on signals which the agent may suppress and replace with counterfeits. This form of fraud may affect the design of optimal contracts drastically, leading to complete market failure in extreme cases. I show that in optimal contracts, the principal deters all fraud, and does so by two complementary mechanisms. First, the principal punishes signals that are suspicious, i.e. appear counterfeit. Second, the principal is lenient on bad signals that the agent could suppress, but does not.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 225.
Date of creation: 17 Sep 2013
Date of revision:
Other versions of this item:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Watson, Joel & Bull, Jesse, 2006.
"Hard Evidence and Mechanism Design,"
University of California at San Diego, Economics Working Paper Series
qt7973v805, Department of Economics, UC San Diego.
- Joel Watson & Jesse Bull, 2004. "Hard Evidence and Mechanism Design," Econometric Society 2004 North American Winter Meetings 433, Econometric Society.
- Bull, Jesse & Watson, Joel, 2002. "Hard Evidence and Mechanism Design," University of California at San Diego, Economics Working Paper Series qt7715f08f, Department of Economics, UC San Diego.
- HOLMSTROM, Bengt, .
"Moral hazard and observability,"
CORE Discussion Papers RP
-379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Green, Jerry R & Laffont, Jean-Jacques, 1986. "Partially Verifiable Information and Mechanism Design," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 447-56, July.
- Lacker, J.M., 1989.
"Optimal Contracts Under Costly State Falsification,"
Purdue University Economics Working Papers
956, Purdue University, Department of Economics.
- Lacker, Jeffrey M & Weinberg, John A, 1989. "Optimal Contracts under Costly State Falsification," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1345-63, December.
- John R. Conlon, 2009. "Two New Conditions Supporting the First-Order Approach to Multisignal Principal-Agent Problems," Econometrica, Econometric Society, vol. 77(1), pages 249-278, 01.
- Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
- Allen, Franklin & Gale, Douglas, 1992.
"Measurement Distortion and Missing Contingencies in Optimal Contracts,"
Springer, vol. 2(1), pages 1-26, January.
- Allen, F. & Gale, D., 1990. "Measurement Distortion And Missing Contingencies In Optimal Contracts," Weiss Center Working Papers 26-90, Wharton School - Weiss Center for International Financial Research.
- Kartik, Navin & Tercieux, Olivier, 2012. "Implementation with evidence," Theoretical Economics, Econometric Society, vol. 7(2), May.
- Paul R. Milgrom, 1979.
"Good Nevs and Bad News: Representation Theorems and Applications,"
407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
- Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
- Giovanni Maggi & Andres Rodriguez-Clare, 1995. "Costly Distortion of Information in Agency Problems," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 675-689, Winter.
- Andrew Clausen & Carlo Strub, 2012. "Envelope theorems for non-smooth and non-concave optimization," ECON - Working Papers 062, Department of Economics - University of Zurich.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gina Reddie).
If references are entirely missing, you can add them using this form.