Contract design and costly verification games / Chongwoo Choe Choe, Chongwoo

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Choe, Chongwoo
Appears In
Journal of Economic Behavior & Organization
Contracts - Mathematical models.; Economics; Contracts -- Economic aspects
The signalling subgame was considered to assess the design of contract and verification under an investor-entrepreneur contract. The game indicated that truth-telling and deterministic verification are not part of an equilibrium behavior as shown by the presence of a unique Perfect Bayesian Equilibrium in mixed strategies. Consideration of the entire game also revealed that less verification expenditure is achieved under a contract formulated by an informed trader.
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