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Mediated audits

Author

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  • Martin Pollrich

Abstract

I study the optimal audit mechanism when the principal cannot commit to an audit strategy. Invoking a revelation principle, the agent reports her type to a mediator who assigns contracts and recommends the principal whether to audit. For each reported type the mediator randomizes over a base-contract and the audit contract, which is accompanied by a recommendation to audit. I characterize the unique threshold value for penalties, that renders auditing profitable. For large penalties the optimal mechanism uses strictly more contracts than types and cannot be implemented via simple menu offers. These results provide a proper benchmark for studying audits under limited commitment, and provide insights on the institutional design of separating auditing from contracting. The analysis sheds new light on the usefulness of mediation in contracting and on the structure of optimal mechanisms in general. Creation Date: 2015-03-05
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Martin Pollrich, 2017. "Mediated audits," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 44-68, March.
    • Handle: RePEc:bla:randje:v:48:y:2017:i:1:p:44-68
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    File URL: http://hdl.handle.net/10.1111/rand.2017.48.issue-1
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    Cited by:

    1. Gretschko, Vitali & Wambach, Achim, 2017. "Contract Design With Limited Commitment," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168269, Verein für Socialpolitik / German Economic Association.
    2. 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.
    3. Andrew Kosenko, 2020. "Mediated Persuasion," Papers 2012.00098, arXiv.org, revised Dec 2020.
    4. Fugger, Nicolas & Gretschko, Vitali & Pollrich, Martin, 2019. "Sequential procurement with limited commitment," ZEW Discussion Papers 19-030, ZEW - Leibniz Centre for European Economic Research.
    5. Gretschko, Vitali & Wambach, Achim, 2017. "Contract (re-)negotiation with private and common values," ZEW Discussion Papers 17-056, ZEW - Leibniz Centre for European Economic Research.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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