Optimal Contracts under Costly State Falsification

Bibliographic Data

ID10177278
AuthorsJeffrey M Lacker (0000-0002-6368-9226), John A Weinberg (0000-0003-4516-9849)
Year1989
Volume97
Issue6
Pages1345-1363
Publication date1989-12-01
Open AccessNo
TypeARTICLE
VenueJournal of Political Economy (JOURNAL)
Journal identifiersISSN: 0022-3808 • E-ISSN: 1537-534X
PublisherUniversity of Chicago Press (PUBLISHER • US)
DOI10.1086/261657
OpenAlexW1979131559
LanguageEN
Citations received16
References cited2

We examine an exchange economy with two agents: one risk neutral with a certain endowment and a second risk averse with a random endowment. The realization of the endowment is public but can be falsified by the second agent at a cost. For a broad class of falsification cost functions the optimal no-falsification contract is noncontingent on a left-hand interval and strictly increasing with a slope strictly less than one on a right-hand interval. Under a mild further restriction, optimal no-falsification contracts are, in addition, piecewise linear. Optimal contracts may in general require falsifying the state, but for a set of the highest endowment realizations there is no falsification. We find simple conditions under which the optimal contract is a i no-falsification contract. Copyright 1989 by University of Chicago Press

Algorithm · Economics · Mathematical economics · Microeconomics · State (computer science · Banking stability, regulation, efficiency · Computer Science · Economic theories and models · Law, Economics, and Judicial Systems

Tools

Open DOISci-Hub