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Imperfect State Verification and Financial Contracting

Standard work on costly state verification, monitoring, and auditing generally assumes perfect signals about the underlying state, especially in questions about financial contracting. Relaxing that assumption has several intriguing consequences. Most imperfect audits turn out to be useless, and those that are useful cannot be ranked by conventional criteria such as Blackwell's information measure. Thus, the notion of "more" or "less" information becomes problematic.

Suggested citation: Haubrich, Joseph, 1995. “Imperfect State Verification and Financial Contracting,” Federal Reserve Bank of Cleveland, Working Paper no. 95-06.

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