Affiliation:
1. Department of Economics, University of York
2. School of Economics and Finance, Queen Mary University of London
Abstract
A principal incentivizes an agent to maintain compliance and to truthfully announce any breaches of compliance. Compliance is imperfectly controlled by the agent's private effort choices, is partially persistent, and is verifiable by the principal only through costly inspections. We show that in principal‐optimal equilibria, the principal enforces maximum compliance using deterministic inspections. Periodic inspection cycles are suspended during periods of self‐reported noncompliance, during which the agent is fined. We show how commitment to random inspections would benefit the principal, and discuss possible ways for the principal to overcome her commitment problem.
Funder
City of Vancouver
University of California Berkeley
Hausdorff Center for Mathematics
Deutsche Forschungsgemeinschaft
Academy of Finland