Abstract

A principal faces an agent who is better informed but biased toward higher actions. She can verify the agent's information and specify his permissible actions. We show that if the verification cost is small enough, a threshold with an escape clause (TEC) is optimal: the agent either chooses an action below a threshold or requests verification and the efficient action above the threshold. For higher costs, however, the principal may require verification only for intermediate actions, dividing the delegation set. TEC is always optimal if the principal cannot commit to inefficient allocations following the verification decision and result.

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Citation

Halac, Marina, and Pierre Yared. "Commitment vs. Flexibility with Costly Verification." Journal of Political Economy 128 (October 2020): 4523-4573.

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