Intuition in the Shadow of the Court
19 Pages Posted: 21 Feb 2020
Date Written: January 24, 2020
We study the welfare effects of changing information quality, given that information has different natures. An agent decides whether to approve a project based on his information, a part of which is verifiable in court. If the project fails, the court examines the verifiable information and decides the punishment. We characterize the optimal penal code, which balances the deterrence of ill-intentioned agents from choosing inefficient actions with the chilling effect it may have on honest agents. We show that welfare consequences of changing information precision depend on its nature: improving verifiable information can reduce welfare; improving unverifiable information increases welfare.
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