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A. De Chiara & L. Livio, ECARES Print
Friday, 02 December 2011, 12:15 - 13:15

Alessandro de Chiara and Luca Livio, ECARES

Truthful Reporting, Moral Hazard and Purely Soft Information

Abstract: In this paper, we present a corruption-proof mechanism which allows a principal to benefit from hiring a risk averse supervisor who monitors the action taken by a productive agent and can misreport the evidence she collects at a negligible cost. We require the report to be sent before the profit realization and we set the payment scheme in such a way that it is sequentially rational for the supervisor to choose a truthful reporting strategy. In particular, we recommend the principal to pay a prize to the supervisor if and only if the content of the report is aligned with the realized profit.
This mechanism reduces the cost of insuring the agent, provided that the signal observed by the supervisor is precise enough.

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