Journal of Monetary Economics volume 60, issue 2, P139-151 2013 DOI: 10.1016/j.jmoneco.2012.11.001 View full text
Roc Armenter, Thomas M. Mertens

Abstract: Social and private insurance schemes rely on legal action to deter fraud and tax evasion. This observation guides us to introduce a random state verification technology in a dynamic economy with private information. With some probability, an agent's skill level becomes known to the planner, who prescribes a punishment if the agent is caught misreporting. We show how deferring consumption can ease the provision of incentives. As a result, the marginal benefit may be below the marginal cost of investment in the …

expand abstract