Journal of Monetary Economics2013-09-05 2:57 AM

Fraud deterrence in dynamic Mirrleesian economies

Highlights • State verification can change the sign of the intertemporal wedge in a private information economy. • We derive conditions under which a non-positive wedge prevails in finite horizon economies. • The infinite horizon economy converges to full insurance without labor distortions. Abstract Insurance schemes rely on legal consequences to deter fraud and tax evasion. This observation guides us to introduce random state verification in a dynamic economy with private information. With some probability, an agent's skill becomes known to the planner who prescribes punishments to misreporting agents. Deferring consumption can ease the provision of incentives creating a motive for subsidizing savings. In an infinite horizon economy, the constrained-efficient allocation converges to high consumption, full insurance, and no labor distortions for any positive probability of state verification.

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Journal of Monetary Economics

The Journal of Monetary Economics is a peer-reviewed academic journal covering research on macroeconomics and monetary economics. It is published by Elsevier and was established in October 1973 by Karl Brunner and Charles I. Plosser.

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