With some probability, an agent's skill level becomes known to the planner, who prescribes a punishment if the agent is caught misreporting. The authors 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 constrained-efficient allocation, suggesting a subsidy on savings. They characterize conditions such that the intertemporal wedge is negative in finite horizon economies. In an infinite horizon economy, the authors find that the constrained-efficient allocation converges to a high level of consumption, full insurance, and no labor distortions for any probability of state verification.
View the Full Working Paper![](/-/media/frbp/assets/images/content/consumer-finance/mortgages/mortgage-meeting/subsectionbanner-mortgagemeeting.jpg)
Working Paper
Fraud Deterrence in Dynamic Mirrleesian Economies
March 2010
WP 10-07 – Social and private insurance schemes rely on legal action to deter fraud and tax evasion. This observation guides the authors to introduce a random state verification technology in a dynamic economy with private information.
Share
Download