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Bounding the benefits of stochastic auditing: The case of risk-neutral agents

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  • Christopher M. Snyder

    ()
    (Department of Economics, George Washington University, 2201 G Street N.W., Washington, DC 20052, USA)

Abstract

In the context of a costly-state-verification model with a risk-neutral agent having limited liability, it has been postulated that allowing stochastic auditing reduces the asymmetric information problem to a trivial one: i.e., the first best can be approached arbitrarily closely with feasible contracts. This paper proves the postulate to be false: the surplus from feasible contracts is bounded strictly below the first-best surplus level. The bound is straightforward to compute in examples. The paper thus removes a justification for the restriction to deterministic auditing commonly made in the literature.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 14 (1999)
Issue (Month): 1 ()
Pages: 247-253

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Handle: RePEc:spr:joecth:v:14:y:1999:i:1:p:247-253

Note: Received: July 18, 1997; revised version: February 23, 1998
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Related research

Keywords: Stochastic auditing · Costly state verification model · Risk neutrality.;

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Cited by:
  1. Mylovanov, Tymofiy & Schmitz, Patrick W., 2007. "Task Scheduling and Moral Hazard," CEPR Discussion Papers 6467, C.E.P.R. Discussion Papers.
  2. David A. Miller & Kareen Rozen, 2011. "Optimally Empty Promises and Endogenous Supervision," Levine's Working Paper Archive 786969000000000270, David K. Levine.

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