Working Paper: CEPR ID: DP12572
Authors: Marina Halac; Pierre Yared
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
JEL Codes: D02; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low verification costs (G19) | optimality of TEC (H21) |
| increasing verification costs (D23) | different optimal delegation strategies (M54) |
| limited commitment power (D10) | restores optimality of TEC (D61) |
| verification costs (G24) | delegation strategies (M54) |
| moderate bias (C46) | decreasing verification strategy optimality (D81) |