Fraud deterrence in dynamic Mirrleesian economies

Roc Armenter () and Thomas Mertens

No 10-7, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Social and private insurance schemes rely on legal action to deter fraud and tax evasion. This observation guides the authors to introduce a random state verification technology in a dynamic economy with private information. With some probability, an agent's skill level becomes known to the planner, who prescribes a punishment if the agent is caught misreporting. The authors show how deferring consumption can ease the provision of incentives. As a result, the marginal benefit may be below the marginal cost of investment in the constrained-efficient allocation, suggesting a subsidy on savings. They characterize conditions such that the intertemporal wedge is negative in finite horizon economies. In an infinite horizon economy, the authors find that the constrained-efficient allocation converges to a high level of consumption, full insurance, and no labor distortions for any probability of state verification.

Keywords: Insurance; Fraud (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cta and nep-ias
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Related works:
Journal Article: Fraud deterrence in dynamic Mirrleesian economies (2013)
Working Paper: Fraud Deterrence in Dynamic Mirrleesian Economies (2010)
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