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Incentive Contracts Under Imperfect Auditing

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  • HSIAO‐CHI CHEN
  • SHI‐MIIN LIU

Abstract

In this paper we analyze the optimal incentive contracts under imperfect auditing. Both principal's commitment and no commitment to auditing cases are investigated. In the commitment case, the Baron–Besanko‐type (RAND Journal of Economics, Vol. 15 (1984), pp. 447–470) contract would fail under imperfect auditing. In the no‐commitment case, the Baron–Myerson (Econometrica, Vol. 50 (1982), pp. 911–930) and the Khalil‐type (RAND Journal of Economics, Vol. 28 (1997), pp. 629–640) contracts could survive under specific misjudging probabilities. In addition, there exists a separate equilibrium with the agent's full compliance and the principal's sure ex post auditing.

Suggested Citation

  • Hsiao‐Chi Chen & Shi‐Miin Liu, 2008. "Incentive Contracts Under Imperfect Auditing," Manchester School, University of Manchester, vol. 76(2), pages 131-159, March.
    • Handle: RePEc:bla:manchs:v:76:y:2008:i:2:p:131-159
    DOI: 10.1111/j.1467-9957.2007.01053.x
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    References listed on IDEAS

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    1. Hindriks, J., 1994. "Income Tax Compliance: The No-Commitment Game," Papers 149, Notre-Dame de la Paix, Sciences Economiques et Sociales.
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    Cited by:

    1. Hsiao-Chi Chen & Shi-Miin Liu, 2009. "An emission tax pollution control system with imperfect monitoring," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 10(1), pages 21-40, March.
    2. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, July.
    3. Hsiao-Chi Chen & Shi-Miin Liu, 2009. "An emission tax pollution control system with imperfect monitoring," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 10(1), pages 21-40, March.
    4. Martin Pollrich, "undated". "The Maximum Punishment Principle and Precision of Audits under Limited Commitment - Preliminary and Incomplete Version -," BDPEMS Working Papers 2015004, Berlin School of Economics.

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