Costly state verification with Limited Commitment

Amirreza Ahmadzadeh
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Amirreza Ahmadzadeh: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse

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Abstract: This paper examines a principal–agent model without transfers in which a Principal mandates actions and conducts costly inspections. The Prin-cipal trades off the benefit of mandating her preferred actions against the Agent's participation, information rents, and inspection costs. I examine which form of commitment matters. Under full commitment, efficient types of the agent are pooled without inspection, intermediate types are inspected with interior probabilities and rewarded for truth-ful reporting after verification, and inefficient types are excluded. In the limited-commitment cases, the Principal's preferred equilibrium involves only deterministic inspection. If she commits only to actions, this equilibrium is the optimal full-commitment mechanism restricted to deterministic inspection; if she commits only to inspection, it requires inspecting some inefficient types.

Keywords: Costly state verification; Mechanism design; Cheap talk; Inspection; Limited commitment; Regulation (search for similar items in EconPapers)
Date: 2026-08-19
Note: View the original document on HAL open archive server: https://hal.science/hal-05720821v1
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