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UBC Theses and Dissertations

Essays in the economics of costly misrepresentation Tam, Yin Chi


This dissertation studies strategic interaction between informed parties and uninformed parties when misrepresenting private information is costly, and optimal mechanisms for the uninformed parties. Chapters 1 and 2 analyze a screening problem in which an agent incurs a fixed cost of lying when she misrepresents her private information. In this environment, local incentive constraints are not binding in the optimal mechanism, and standard techniques for solving screening problems are not applicable. Chapter 1 establishes general properties of the optimal mechanism. Chapter 2 develops a new methodology to tackle the problem with non-local binding constraints, characterizes the optimal mechanism and computes it in special cases. The method involves a procedure that jointly solves for the binding non-local incentive constraints and the optimal allocation. The optimal mechanism has a number of novel qualitative properties, such as lack of exclusion and first-best efficient allocation at high- and low- ends of the spectrum of types. Also, bunching never occurs, as the optimal quantity allocation is always increasing in type irrespectively of type distribution. Chapter 3 analyzes strategic interactions between lying and lie-detection, and studies the optimal design for costly lie-detection and its effectiveness. An informed sender wants to persuade an uninformed receiver to take high actions but the receiver wants to match the action with the true state. The sender makes a claim about the true state and the receiver decides whether to incur a cost to inspect the truthfulness of the claim. I show that the receiver-optimal equilibrium has a three-interval structure: types in the top interval make precise and truthful claims about the state, which are mimicked by types in the bottom interval and randomly inspected, while types in the middle interval make a truthful but vague claim that is never inspected. Compared to state verification, lie-detection is shown to be more beneficial to the receiver because it provides incentives for moderate and high types to be truthful. This suggests that fact-checking of politicians' claims is effective in holding them countable and deterring them from lying.

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