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Firm corruption in the presence of an auditor

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  • Michael Dietrich

    ()
    (Department of Economics, The University of Sheffield)

  • Jolian McHardy

    ()
    (Department of Economics, The University of Sheffield)

  • Abhijit Sharma

Abstract

This paper develops a framework to explore firm corruption taking account of interaction with an auditor. The basic idea is that an auditor can provide auditing and other (consultancy) services. The extent of the other services depends on firm profitability. Hence auditor profitability can increase with firm corruption that may provide an incentive to collude in corrupt practices. This basic idea is developed using a game theoretic framework. It is shown that a multiplicity of equilibria exist from stable corruption, through auditor controlled corruption, via multiple equilibria to honesty on behalf of both actors. Following the development of the model various policy options are highlighted that show the difficulty of completely removing corrupt practices.

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File URL: http://www.shef.ac.uk/economics/research/serps/articles/2010_016.html
File Function: First version, 2010
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Bibliographic Info

Paper provided by The University of Sheffield, Department of Economics in its series Working Papers with number 2010016.

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Length: 26 pages
Date of creation: Jul 2010
Date of revision: Jul 2010
Handle: RePEc:shf:wpaper:2010016

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Keywords: Firm corruption; auditor corruption; perfect equilibrium;

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  1. Juan D. Carrillo, 2000. "Graft, Bribes, and the Practice of Corruption," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 257-286, 06.
  2. Jakob Svensson, 2005. "Eight Questions about Corruption," Journal of Economic Perspectives, American Economic Association, vol. 19(3), pages 19-42, Summer.
  3. Ariane Lambert-Mogiliansky & Konstantin Sonin, 2006. "Collusive Market Sharing and Corruption in Procurement," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 883-908, December.
  4. Samuel, Andrew, 2009. "Preemptive collusion among corruptible law enforcers," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 441-450, August.
  5. Giovanni Immordino & Marco Pagano, 2005. "Optimal Regulation of Auditing," CSEF Working Papers 133, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 May 2007.
  6. Lessmann, Christian & Markwardt, Gunther, 2008. "One size fits all? Decentralization, corruption, and the monitoring of bureaucrats," Dresden Discussion Paper Series in Economics 14/08, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  7. John C. Coffee, 2005. "A Theory of Corporate Scandals: Why the USA and Europe Differ," Oxford Review of Economic Policy, Oxford University Press, vol. 21(2), pages 198-211, Summer.
  8. Mishra, Ajit, 2006. "Persistence of corruption: some theoretical perspectives," World Development, Elsevier, vol. 34(2), pages 349-358, February.
  9. repec:pse:psecon:2005-25 is not listed on IDEAS
  10. Juan D. Carrillo, 2000. "Graft, Bribes, and the Practice of Corruption," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(2), pages 257-288, 06.
  11. Laffont, Jean-Jacques & N'Guessan, Tchetche, 1999. "Competition and corruption in an agency relationship," Journal of Development Economics, Elsevier, vol. 60(2), pages 271-295, December.
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