Abstract
This paper considers paternalistic principals. That is, the principal and the agent have the same objective, except that the agent's decision is possibly distorted by a (subjective) parameter. Many real world examples can be subsumed under this heading: `split' personalities, relations between father and son and public policies concerning merit goods (e.g. education). The paper considers three different assumptions about the costs of subsidies: (a) pure transfers with no costs; (b) full costs as in the traditional mechanism design; (c) only subsidies exceeding the gain from intervention put a burden on the principal. Finally, this framework is extended to allow for fines and punishment, which require to drop the participation constraint, but improves the agent's performance.
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