The Wrong Kind of Information
38 Pages Posted: 21 Feb 2020 Last revised: 3 Aug 2020
Date Written: July 30, 2020
An agent decides whether to approve a project based on his information, some of which is verified by the principal. 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 principal examines the verifiable information and decides the punishment. The principal 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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