Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If You Use a Screen Reader

This content is available through Read Online (Free) program, which relies on page scans. Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.

Optimal Contracts under Costly State Falsification

Jeffrey M. Lacker and John A. Weinberg
Journal of Political Economy
Vol. 97, No. 6 (Dec., 1989), pp. 1345-1363
Stable URL: http://www.jstor.org/stable/1833242
Page Count: 19
  • Read Online (Free)
  • Download ($14.00)
  • Subscribe ($19.50)
  • Cite this Item
Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Optimal Contracts under Costly State Falsification
Preview not available

Abstract

We examine an exchange economy with two agents: one risk neutral with a certain endowment and a second risk averse with a random endowment. The realization of the endowment is public but can be falsified by the second agent at a cost. For a broad class of falsification cost functions the optimal no-falsification contract is noncontingent on a left-hand interval and strictly increasing with a slope strictly less than one on a right-hand interval. Under a mild further restriction, optimal no-falsification contracts are, in addition, piece-wise linear. Optimal contracts may in general require falsifying the state, but for a set of the highest endowment realizations there is no falsification. We find simple conditions under which the optimal contract is a no-falsification contract. The model has applications that include financial, insurance, and employment contracts and tax policy.

Page Thumbnails

  • Thumbnail: Page 
1345
    1345
  • Thumbnail: Page 
1346
    1346
  • Thumbnail: Page 
1347
    1347
  • Thumbnail: Page 
1348
    1348
  • Thumbnail: Page 
1349
    1349
  • Thumbnail: Page 
1350
    1350
  • Thumbnail: Page 
1351
    1351
  • Thumbnail: Page 
1352
    1352
  • Thumbnail: Page 
1353
    1353
  • Thumbnail: Page 
1354
    1354
  • Thumbnail: Page 
1355
    1355
  • Thumbnail: Page 
1356
    1356
  • Thumbnail: Page 
1357
    1357
  • Thumbnail: Page 
1358
    1358
  • Thumbnail: Page 
1359
    1359
  • Thumbnail: Page 
1360
    1360
  • Thumbnail: Page 
1361
    1361
  • Thumbnail: Page 
1362
    1362
  • Thumbnail: Page 
1363
    1363