Affiliation:
1. Coller School of Management, Tel Aviv University (email: )
2. Eitan Berglas School of Economics, Tel Aviv University (email: )
3. Department of Economics, University of Bristol (email: )
Abstract
We develop a model in which two players sequentially and publicly examine a project. In our model the player who moves first can fabricate evidence to influence the second mover, which creates a moral hazard problem. We find that early strategic uncertainty can mitigate this problem. In particular, for intermediate prior beliefs about the project’s quality, the Pareto-dominant equilibrium is in mixed strategies and consists of an early stage in which evidence may be fabricated and a later stage in which evidence is always authentic. Our findings shed light on the dynamics of R&D, quality assurance, and drug approval. (JEL D82, D83, L15)
Publisher
American Economic Association
Subject
General Economics, Econometrics and Finance
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