The Division of Surplus and the Burden of Proof

Deniz Kattwinkel and Justus Preusser

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Abstract: A surplus must be divided between a principal and an agent. Only the agent knows the surplus' true size and decides how much of it to reveal initially. Both parties can exert costly effort to conclusively prove the surplus' true size. The agent's liability is bounded by the revealed surplus. The principal is equipped with additional funds. The principal designs a mechanism that allocates the burden of proof and divides the surplus. In principal-optimal mechanisms, the principal's effort to acquire proof decreases in the revealed surplus. The agent's effort initially decreases, but then the sign of its slope alternates across five intervals. Applications include wealth taxation, corporate finance, and public procurements.

Date: 2025-01, Revised 2025-03
New Economics Papers: this item is included in nep-cta, nep-des and nep-mic
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