🤖 AI Summary
This paper examines residual value allocation and evidentiary burden assignment within a principal–agent framework: the agent privately observes the residual magnitude and chooses an initial disclosure; both parties incur costly effort to acquire hard evidence, and the agent’s liability is capped at the disclosed value. The principal commits to her own effort level and designs the allocation rule based on evidence ownership. The study is the first to endogenize evidentiary costs, disclosure constraints, and liability caps into optimal mechanism design. It derives closed-form solutions for both parties’ evidentiary efforts and reveals that the agent’s effort exhibits a non-monotonic, five-region pattern in response to the disclosure level. The results characterize the fundamental trade-off between residual allocation efficiency and evidentiary incentives, providing theoretical foundations for wealth taxation, corporate finance, and public procurement.
📝 Abstract
A surplus must be divided between a principal and an agent. Only the agent knows the surplus' true size and decides how much of it to reveal initially. Both parties can exert costly effort to conclusively prove the surplus' true size. The agent's liability is bounded by the revealed surplus. The principal is equipped with additional funds. The principal designs a mechanism that allocates the burden of proof and divides the surplus. In principal-optimal mechanisms, the principal's effort to acquire proof decreases in the revealed surplus. The agent's effort initially decreases, but then the sign of its slope alternates across five intervals. Applications include wealth taxation, corporate finance, and public procurements.