Albin Erlanson (Stockholm School of Economics)

"Costly Verification in Collective decisions"

15 January 2018, 12:45 pm

Abstract

We study how a principal should optimally choose between implementing a new policy and maintaining the status quo when the information relevant for the decision is privately held by agents. Agents are  strategic in revealing their information, but the principal can verify an agent's information at a given cost. We exclude monetary transfers. When is it worthwhile for the principal to incur the cost and learn an agent's information?  We characterize the mechanism that maximizes the expected utility of the principal. The evidence is verified whenever it is decisive for the principal's decision. This mechanism can be implemented as a weighted majority voting rule, where agents are given additional weight if they provide evidence for their information. The evidence is verified whenever it is decisive for the principal's decision.  Additionally, we find a general equivalence between Bayesian and ex-post incentive compatible mechanisms in this setting. Finally, we extend our analysis of optimal mechanisms to imperfect verification.