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Costly state verification with Limited Commitment

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  • Amirreza Ahmadzadeh

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse)

Abstract

This paper examines a principal–agent model without transfers in which a Principal mandates actions and conducts costly inspections. The Prin-cipal trades off the benefit of mandating her preferred actions against the Agent's participation, information rents, and inspection costs. I examine which form of commitment matters. Under full commitment, efficient types of the agent are pooled without inspection, intermediate types are inspected with interior probabilities and rewarded for truth-ful reporting after verification, and inefficient types are excluded. In the limited-commitment cases, the Principal's preferred equilibrium involves only deterministic inspection. If she commits only to actions, this equilibrium is the optimal full-commitment mechanism restricted to deterministic inspection; if she commits only to inspection, it requires inspecting some inefficient types.

Suggested Citation

  • Amirreza Ahmadzadeh, 2026. "Costly state verification with Limited Commitment," Working Papers hal-05720821, HAL.
    • Handle: RePEc:hal:wpaper:hal-05720821
    Note: View the original document on HAL open archive server: https://hal.science/hal-05720821v1
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