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German Working Papers in Law and Economics
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Volume 2005

AUTHOR:
Roland Kirstein

TITLE:
Bayesian Monitoring.

SUGGESTED CITATION:
Roland Kirstein (2005) "Bayesian Monitoring.", German Working Papers in Law and Economics: Vol. 2005: Article 11.
http://www.bepress.com/gwp/default/vol2005/iss1/art11


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ABSTRACT:

This paper presents a modification of the inspection game: The “Bayesian Monitoring” model rests on the assumption that judges are interested in enforcing compliant behavior and making correct decisions. They may base their judgements on an informative but imperfect signal which can be generated costlessly. In the original inspection game, monitoring is costly and generates a perfectly informative signal. While the inspection game has only one mixed strategy equilibrium, three Perfect Bayesian Equilibria exist in my model (one in pure strategies, two in mixed). These outcomes can be described with respect to their punishment styles: tyrannic, draconian, and lenient. The Bayesian Monitoring model, just as the inspection game, has different implications than enforcement models in the tradition of Becker (1968). Total deterrence of bad behavior is impossible, and the equilibrium probability of good behavior is independent of the suspect’s own payoff parameters. Hence, the maximum fine result does not apply.




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