Roc Armenter : Research

with Thomas Mertens.

Insurance schemes rely on legal action to deter fraudulent claims. We capture this aspect by introducing a random state verification technology in a dynamic economy with private information. With some probability, an agent's skill level becomes known, allowing to punish misreporting agents. We demonstrate how deferring consumption can ease the provision of incentives. As a result, the marginal benefit of investment can be below its marginal cost, which suggests subsidizing savings. In an infinite horizon economy, the constrained-efficient allocation converges to a high consumption level, full insurance, and no labor distortions.