Commitment vs. Flexibility with Costly Verification

Marina Halac and Pierre Yared

No 12572, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A principal faces an agent who is better informed but biased towards 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 is allowed to choose any action below a threshold or request verification and the efficient action if sufficiently constrained. 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.

Keywords: Optimal delegation; Costly verification; Escape clause (search for similar items in EconPapers)
JEL-codes: D02 D82 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Commitment vs. Flexibility with Costly Verification (2016)
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