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.
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Bibliographic InfoPaper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2013-13.
Date of creation: 2013
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- NEP-ALL-2013-12-29 (All new papers)
- NEP-CTA-2013-12-29 (Contract Theory & Applications)
- NEP-HPE-2013-12-29 (History & Philosophy of Economics)
- NEP-MIC-2013-12-29 (Microeconomics)
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