Screening Ethics When Honest Agents Keep Their Word

Boston College Economics Working Paper No. 562

37 Pages Posted: 5 Feb 2005

See all articles by Ingela Alger

Ingela Alger

University of Toulouse 1 - Toulouse School of Economics (TSE); CNRS UMR 5314 TSE-R; Institute for Advanced Study in Toulouse

Régis Renault

University of Cergy-Pontoise - THEMA

Date Written: January 2005

Abstract

Using the canonical principal-agent setting with adverse selection, we study the implications of honesty when it requires pre-commitment. Within a two-period hidden information problem, an agent learns his match with the assigned task in period 2 and, if honest, reveals it to the principal if he has committed to it. The principal may offer a menu of mechanisms to screen ethics. Both honest and dishonest agents are willing to misrepresent their ethics. Equilibrium ethics screening occurs if both honesty and a good match are sufficiently likely: the principal leaves a smaller rent to an honest while screening matches for a dishonest by inducing a message reversal by the dishonest. Otherwise, if dishonesty is likely, the principal offers the standard second-best mechanism, while if both dishonesty and a good match are unlikely, she offers the first-best mechanism, implying that no match screening occurs for a dishonest.

Keywords: ethics, honesty, loyalty, adverse selection, screening

JEL Classification: D82

Suggested Citation

Alger, Ingela and Renault, Régis, Screening Ethics When Honest Agents Keep Their Word (January 2005). Boston College Economics Working Paper No. 562, Available at SSRN: https://ssrn.com/abstract=657266 or http://dx.doi.org/10.2139/ssrn.657266

Ingela Alger (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

CNRS UMR 5314 TSE-R ( email )

France

Institute for Advanced Study in Toulouse ( email )

31015 Toulouse, Cedex 6
France

Régis Renault

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France
+33 1 34 25 6173 (Phone)

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