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Screening Ethics when Honest Agents Care about Fairness

  • Ingela Alger

    ()

    (Boston College)

  • Regis Renault

    ()

    (GEMMA, Université de Caen)

We explore the potential for discriminating between honest and dishonest agents, when a principal faces an agent with private information about the circumstances of the exchange (good or bad). When honest agents reveal circumstances truthfully independently of the contract offered, the principal leaves a rent only to dishonest agents (even if honest agents are willing to lie about their ethics); the principal is able to screen between good and bad circumstances. In contrast, if honest behavior is conditional on the contract being fair, the principal cannot screen along the ethics dimension. If the probability that the agent is dishonest is large, the optimal mechanism is as if the agent were dishonest with certainty (standard second best). Otherwise, it is as if the agent were honest with certainty (first best). In the latter case, the principal is unable to screen between circumstances if the agent is dishonest.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 489.

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Date of creation: 30 Nov 2000
Date of revision: 09 Nov 2004
Handle: RePEc:boc:bocoec:489
Note: This paper was previously circulated as "Screening among Agents with Heterogeneous Ethics".
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  1. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
  2. Dawes, Robyn M & Thaler, Richard H, 1988. "Anomalies: Cooperation," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 187-97, Summer.
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  4. Forges, Francoise & Koessler, Frederic, 2005. "Communication equilibria with partially verifiable types," Journal of Mathematical Economics, Elsevier, vol. 41(7), pages 793-811, November.
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  6. Picard, Pierre, 1996. "Auditing claims in the insurance market with fraud: The credibility issue," Journal of Public Economics, Elsevier, vol. 63(1), pages 27-56, December.
  7. Brian Erard & Jonathan Feinstein, 1993. "Honesty and Evasion in the Tax Compliance Game," Carleton Economic Papers 93-06, Carleton University, Department of Economics, revised 1994.
  8. Ingela Alger & Regis Renault, 2003. "Screening Ethics when Honest Agents Keep their Word," Boston College Working Papers in Economics 562, Boston College Department of Economics, revised 09 Nov 2004.
  9. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 651-66, November.
  10. Lacker, J.M., 1989. "Optimal Contracts Under Costly State Falsification," Purdue University Economics Working Papers 956, Purdue University, Department of Economics.
  11. Tirole, Jean, 1991. "Collusion and the Theory of Organizations," IDEI Working Papers 9, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
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