Verification of the Information Privately Owned by a Principal

Abstract

We study a principal-agent relationship in which the information privately owned by a principal is subject to verification by an uninformed agent. The agent's information verification effort, however, is unverifiable(non-contractible). Therefore, the agent may accuse the truthful principal without verifying the reported information. The principal, in equilibrium, misreports with strictly positive probability to induce the agent to verify the reported information. Moreover, the principal designs the contract such that it is terminated when her misreport is discovered by the agent. Termination of the contract occurs with strictly positive probability on the equilibrium path.