Ahmadzadeh, Amirreza and Waizmann, Stephan (2024) Mechanism Design with Costly Inspection. TSE Working Paper, n. 24-1533, Toulouse

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This paper studies how to combine screening menus and inspection in mechanism design. A Principal procures a good from an Agent whose cost is his private information. The Principal has three instruments: screening menus —i.e., quantities and transfers — and (ex-ante) inspection. Inspection is costly but reveals the Agent’s cost. The combination of inspection and screening menus mitigates inefficiencies: the optimal mechanism procures an efficient quantity from all Agents whose cost of production is sufficiently low, regardless of whether inspection has taken place. However, quantity distortions still necessarily occur in optimal regulation; the quantity procured from Agents with higher production costs is inefficiently low. Both results are true regardless of the magnitude of inspection costs. In contrast to settings without inspection, incentive compatibility con-straints do not bind locally. This paper provides a method to address this challenge, characterizing which constraints bind.

Item Type: Monograph (Working Paper)
Language: English
Date: May 2024
Place of Publication: Toulouse
Uncontrolled Keywords: Mechanism Design, Verification, Principal-Agent, Inspection, Procurement
JEL Classification: D82 - Asymmetric and Private Information
D86 - Economics of Contract - Theory
L51 - Economics of Regulation
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse Capitole
Site: UT1
Date Deposited: 14 May 2024 12:38
Last Modified: 14 May 2024 12:38
OAI Identifier: oai:tse-fr.eu:129335
URI: https://publications.ut-capitole.fr/id/eprint/49376
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