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Useless Prevention vs. Costly Remediation

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  • Jean Guillaume Forand

    (Department of Economics, University of Waterloo)

Abstract

I model the dynamic agency relationship underlying prevention. In each period, a principal can transfer resources to an agent that has private information about a problem, which the agent can direct to solving the problem or divert into rents. Problems are persistent and rectifiable: they randomly generate observable disasters until enough resources have been committed to solving them. I characterise the principal's equilibrium trade-off between (a) preventing disasters while squandering transfers in informational rents to agents facing trivial problems and (b) limiting transfers and remediating costly disasters that eliminate agents informational advantage and prove the need for action.

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Bibliographic Info

Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number 1207.

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Length: 37 pages
Date of creation: Jul 2012
Date of revision: Dec 2012
Handle: RePEc:wat:wpaper:1207

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  1. Ana Fernandes & Christopher Phelan, 1999. "A recursive formulation for repeated agency with history dependence," Staff Report 259, Federal Reserve Bank of Minneapolis.
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