Mechanism Design with Costly Inspection

Amirreza Ahmadzadeh and Stephan Waizmann

No 24-1533, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This paper studies how to combine screening menus and inspection in mechanism design. A Principal procures a good from an Agent whose cost is his private information. The Principal has three instruments: screening menus —i.e., quantities and transfers — and (ex-ante) inspection. Inspection is costly but reveals the Agent’s cost. The combination of inspection and screening menus mitigates inefficiencies: the optimal mechanism procures an efficient quantity from all Agents whose cost of production is sufficiently low, regardless of whether inspection has taken place. However, quantity distortions still necessarily occur in optimal regulation; the quantity procured from Agents with higher production costs is inefficiently low. Both results are true regardless of the magnitude of inspection costs. In contrast to settings without inspection, incentive compatibility con-straints do not bind locally. This paper provides a method to address this challenge, characterizing which constraints bind.

Keywords: Mechanism Design; Verification; Principal-Agent; Inspection, Procurement (search for similar items in EconPapers)
JEL-codes: D82 D86 L51 (search for similar items in EconPapers)
Date: 2024-05, Revised 2024-09
New Economics Papers: this item is included in nep-cta, nep-des, nep-inv, nep-mac and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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