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Costless Information and Costly Verification: A Case for Transparency

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  • Deniz Kattwinkel
  • Jan Knoepfle

Abstract

A principal has to take a binary decision. She relies on information privately held by an agent who prefers the same action regardless of his type. The principal cannot incentivize with transfers but can learn the agent’s type at a cost. Additionally, the principal privately observes a signal correlated with the agent’s type. Transparent mechanisms are optimal: the principal’s payoff is the same as if her signal was public. A simple cutoff form is optimal: favorable signals ensure the agent’s preferred action. Signals below this cutoff lead to the nonpreferred action unless the agent appeals. An appeal always triggers type verification.

Suggested Citation

  • Deniz Kattwinkel & Jan Knoepfle, 2023. "Costless Information and Costly Verification: A Case for Transparency," Journal of Political Economy, University of Chicago Press, vol. 131(2), pages 504-548.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/721618
    DOI: 10.1086/721618
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    Cited by:

    1. Bloch, Francis & Dutta, Bhaskar & Dziubiński, Marcin, 2023. "Selecting a winner with external referees," Journal of Economic Theory, Elsevier, vol. 211(C).

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