Deterring bribery with Scotch Hold 'em Poker

With Andrew Clausen.
We study principal-monitor-agent problems where monitors can take bribes to hide evidence. We find that the cheapest bribe-proof mechanism resembles a novel game of poker. Both players are dealt a hand (their private information). If the monitor refuses the bribe and reveals evidence then the game moves to a showdown. If a player's hand wins by a suitable margin in the showdown, then that player gets a prize. This game engineers a two-sided lemons problem in bribe negotiations. Hiding evidence forgoes a showdown so no player wants to negotiate with a (much) weaker handed player. Negotiations unravel with the strongest hand leaving first, and successively weaker hands leaving with each round of iterated reasoning. The mechanism is robust to monitoring mistakes, limited liability and arbitrary negotiation protocols. It also demonstrates novel "worst-case" information structures that delimit the most unfavourable conditions for coordination.

Previously circulated under the title "Lemons by Design: Sowing Secrets to Curb Corruption"

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