We examine an exchange economy with two agents: one risk neutral with a certain endowment and a second risk averse with a random endowment. The realization of the endowment is public but can be falsified by the second agent at a cost. For a broad class of falsification cost functions the optimal no-falsification contract is noncontingent on a left-hand interval and strictly increasing with a slope strictly less than one on a right-hand interval. Under a mild further restriction, optimal no-falsification contracts are, in addition, piece-wise linear. Optimal contracts may in general require falsifying the state, but for a set of the highest endowment realizations there is no falsification. We find simple conditions under which the optimal contract is a no-falsification contract. The model has applications that include financial, insurance, and employment contracts and tax policy.

We examine a general equilibrium model of asset prices in the presence of a simple informational imperfection. Assets are productive only when combined with managerial services. A manager “controls” an asset; he can conceal some of the output at a cost. This limits the extent to which managers can shed risk by issuing claims. Incentive compatibility drives a wedge, the “value of control”, between physical and financial asset values. Equilibrium allocations can be supported by alternative specifications of the right to “name the next manager”. If this right is assigned to holders of claims, then financial asset prices exhibit “excess volatility.”

We examine an exchange economy with two agents: one risk neutral with a certain endowment and a second risk averse with a random endowment. The realization of the endowment is public but can be falsified by the second agent at a cost. For a broad class of falsification cost functions the optimal no-falsification contract is noncontingent on a left-hand interval and strictly increasing with a slope strictly less than one on a right-hand interval. Under a mild further restriction, optimal no-falsification contracts are, in addition, piece-wise linear. Optimal contracts may in general require falsifying the state, but for a set of the highest endowment realizations there is no falsification. We find simple conditions under which the optimal contract is a no-falsification contract. The model has applications that include financial, insurance, and employment contracts and tax policy.