When
Where
Bruno Strulovici, Professor of Economics, Northwestern University
A Taxation Principle with Non-Contractible Events
Abstract
The Taxation Principle describes principal-agent settings in which the principal gains nothing from trying to elicit the agent’s private information before the agent takes some action. Standard versions of the principle assume that the principal can observe the agent’s action and set a distinct transfer for each action. We consider instead settings in which the agent’s action is not directly verifiable and nonzero transfers are feasible only when specific consequences of these actions are observed. For example, a reckless agent may be fined or punished only if recklessness leads to an observable accident and go unpunished otherwise. We identify conditions under which the Taxation Principle holds for such settings and counterexamples when the conditions are violated. Applications include choice of experiments by a privately informed agent and decisions to commit crime with privately known propensities to commit crime.