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- W2020020671 abstract "In a Costly State Verification world, an agent who has private information regarding the state of the world must report what state occurred to a principal, who can verify the state at a cost. An agent then has what is called ex post moral hazard: he has an incentive to misreport the true state to extract rents from the principal. Assuming the principal cannot commit to an auditing strategy, the optimal contract is such that: (1) the agent's expected marginal utility when there is an accident (high- and low-loss states) is equal to his marginal utility when there is no accident; (2) the lower loss is undercompensated, while the higher loss is overcompensated; and (3) the welfare of the agent is greater under commitment than under no-commitment. Result 2 is contrary to the results obtained if the principal can commit to an auditing strategy (higher losses underpaid and lower losses overpaid). The reason is that by increasing the difference between the high and the low indemnity payments, the probability of fraud is reduced." @default.
- W2020020671 created "2016-06-24" @default.
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- W2020020671 date "2004-12-23" @default.
- W2020020671 modified "2023-10-03" @default.
- W2020020671 title "Overcompensation as a Partial Solution to Commitment and Renegotiation Problems: The Case of Ex Post Moral Hazard" @default.
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