The Wrong Kind of Information
39 Pages Posted: 21 Feb 2020 Last revised: 25 Feb 2021
Date Written: Februrary 25, 2020
An agent decides whether to approve a project based on his information, some of which is verified by a court. An honest agent wants to implement projects that are likely to succeed; a dishonest agent wants to implement any project. If the project fails, the court examines the verifiable information and decides the punishment. The court seeks to deter ill-intentioned agents from implementing projects likely to fail while incentivizing the use of the unverifiable information. We show how information of different kinds affects welfare. Improving the verifiable information can reduce welfare, while improving the unverifiable information always increases welfare.
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