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Timing of Verification Procedures: Monitoring versus Auditing

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  • Roland Strausz

Abstract

In an agency model this paper studies the strategic effect of a difference in timing of verification. A principal may choose between two equally efficient verification procedures: monitoring and auditing. Under auditing the principal receives additional information. Due to a double moral hazard problem there exists a tension between incentives for effort and incentives for verification. Auditing exacerbates this tension and, consequently, requires steeper incentive schemes than monitoring. Hence, auditing is suboptimal if 1) steep incentives structures are costly to implement due to bounded transfers, or 2) steep incentive schemes induce higher rents due to limited liability.

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  • Roland Strausz, "undated". "Timing of Verification Procedures: Monitoring versus Auditing," Papers 015, Departmental Working Papers.
  • Handle: RePEc:bef:lsbest:015
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    References listed on IDEAS

    as
    1. Maskin, Eric & Riley, John, 1985. "Input versus output incentive schemes," Journal of Public Economics, Elsevier, vol. 28(1), pages 1-23, October.
    2. Strausz, Roland, 2006. "Buried in paperwork: Excessive reporting in organizations," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 460-470, August.
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    11. Roland Strausz, 2001. "Mitigating Non-Contractability with Interim Randomization," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(2), pages 231-245, June.
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    Cited by:

    1. Peter-J. Jost, 2023. "Auditing versus monitoring and the role of commitment," Review of Accounting Studies, Springer, vol. 28(2), pages 463-496, June.
    2. Strausz, Roland, 2006. "Buried in paperwork: Excessive reporting in organizations," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 460-470, August.
    3. Kuhn, Michael & Siciliani, Luigi, 2013. "Manipulation and auditing of public sector contracts," European Journal of Political Economy, Elsevier, vol. 32(C), pages 251-267.
    4. Tan, Teck Yong, 2023. "Optimal transparency of monitoring capability," Journal of Economic Theory, Elsevier, vol. 209(C).
    5. De Chiara, Alessandro & Livio, Luca, 2017. "The threat of corruption and the optimal supervisory task," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 172-186.
    6. Andrei Barbos, 2022. "Optimal contracts with random monitoring," International Journal of Game Theory, Springer;Game Theory Society, vol. 51(1), pages 119-154, March.
    7. Corinne Langinier & Philippe Marcoul, 2016. "The Search of Prior Art and the Revelation of Information by Patent Applicants," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 49(3), pages 399-427, November.
    8. Angelucci, Charles & Russo, Antonio, 2012. "Moral Hazard in Hierarchies and Soft Information," TSE Working Papers 12-343, Toulouse School of Economics (TSE).
    9. Mr. Luc E. Leruth & Elisabeth Paul, 2006. "A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries," IMF Working Papers 2006/204, International Monetary Fund.
    10. Langinier, Corinne & Marcoul, Philippe, 2007. "Patents, Search of Prior Art, and Revelation of Information," Staff General Research Papers Archive 10489, Iowa State University, Department of Economics.

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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