IDEAS home Printed from https://ideas.repec.org/a/bla/randje/v48y2017i1p44-68.html
   My bibliography  Save this article

Mediated audits

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/rand.2017.48.issue-1
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Vasiliki Skreta, 2000. "Sequentially Optimal Mechanisms," Econometric Society World Congress 2000 Contributed Papers 1521, Econometric Society.
    2. Picard, Pierre, 1996. "Auditing claims in the insurance market with fraud: The credibility issue," Journal of Public Economics, Elsevier, vol. 63(1), pages 27-56, December.
    3. Graetz, Michael J & Reinganum, Jennifer F & Wilde, Louis L, 1986. "The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(1), pages 1-32, Spring.
    4. Attar, Andrea & Campioni, Eloisa, 2003. "Costly state verification and debt contracts: a critical resume," Research in Economics, Elsevier, vol. 57(4), pages 315-343, December.
    5. Helmut Bester & Roland Strausz, "undated". "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
    6. Lang, Matthias & Wambach, Achim, 2013. "The fog of fraud – Mitigating fraud by strategic ambiguity," Games and Economic Behavior, Elsevier, vol. 81(C), pages 255-275.
    7. Nahum D. Melumad & Dilip Mookherjee, 1989. "Delegation as Commitment: The Case of Income Tax Audits," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 139-163, Summer.
    8. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    9. Kim C. Border & Joel Sobel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 525-540.
    10. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-1098, July.
    11. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    12. Stephanie A. Dunne & Mark A. Loewenstein, 1995. "Costly Verification of Cost Performance and the Competition for Incentive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 690-703, Winter.
    13. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
    14. Goltsman, Maria & Hörner, Johannes & Pavlov, Gregory & Squintani, Francesco, 2009. "Mediation, arbitration and negotiation," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1397-1420, July.
    15. 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.
    16. Kalyan Chatterjee & Sanford Morton & Arijit Mukherji, 2008. "Strategic Audit Policies Without Commitment," Springer Optimization and Its Applications, in: Altannar Chinchuluun & Panos M. Pardalos & Athanasios Migdalas & Leonidas Pitsoulis (ed.), Pareto Optimality, Game Theory And Equilibria, pages 407-436, Springer.
    17. Barry Nalebuff & David Scharfstein, 1987. "Testing in Models of Asymmetric Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(2), pages 265-277.
    18. Françoise Forges, 1990. "Equilibria with Communication in a Job Market Example," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 375-398.
    19. Forges, Francoise M, 1986. "An Approach to Communication Equilibria," Econometrica, Econometric Society, vol. 54(6), pages 1375-1385, November.
    20. Vasiliki Skreta, 2006. "Sequentially Optimal Mechanisms -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(4), pages 1085-1111.
    21. Krishna, Vijay & Morgan, John, 2004. "The art of conversation: eliciting information from experts through multi-stage communication," Journal of Economic Theory, Elsevier, vol. 117(2), pages 147-179, August.
    22. 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.
    23. Joel S. Demski & David E.M. Sappington & Pablo T. Spiller, 1987. "Managing Supplier Switching," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 77-97, Spring.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Heiko Gerlach, 2013. "Self-Reporting, Investigation, and Evidentiary Standards," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 1061-1090.
    2. Bester, Helmut & Strausz, Roland, 2007. "Contracting with imperfect commitment and noisy communication," Journal of Economic Theory, Elsevier, vol. 136(1), pages 236-259, September.
    3. Leandro Arozamena & Martin Besfamille & Pablo Sanguinetti, 2010. "Optimal taxes and penalties when the government cannot commit to its audit policy," Department of Economics Working Papers 2010-10, Universidad Torcuato Di Tella.
    4. Hsiao-Chi Chen & Shi-Miin Liu, 2005. "Dynamic Incentive Contracts under No-Commitment to Periodic Auditing and a Non-retrospective Penalty System," Journal of Economics, Springer, vol. 85(2), pages 107-139, August.
    5. Finkle, Aaron & Shin, Dongsoo, 2007. "Conducting inaccurate audits to commit to the audit policy," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 379-389, April.
    6. Fahad Khalil & Jacques Lawarrée, 2006. "Incentives For Corruptible Auditors In The Absence Of Commitment," Journal of Industrial Economics, Wiley Blackwell, vol. 54(2), pages 269-291, June.
    7. Martin Besfamille & Pablo Olmos, 2010. "Inspectors or Google Earth? Optimal fiscal policies under uncertain detection of evaders," Department of Economics Working Papers 2010-09, Universidad Torcuato Di Tella.
    8. Nicolas Boccard & Patrick Legros, 2017. "Audit Competition in Insurance Oligopolies," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 12(3), pages 371-399, September.
    9. Skreta, Vasiliki, 2015. "Optimal auction design under non-commitment," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 854-890.
    10. , & ,, 2013. "Implementation of communication equilibria by correlated cheap talk: The two-player case," Theoretical Economics, Econometric Society, vol. 8(1), January.
    11. Andrew Yim, 2009. "Efficient Committed Budget for Implementing Target Audit Probability for Many Inspectees," Management Science, INFORMS, vol. 55(12), pages 2000-2018, December.
    12. Aaron Finkle & Dongsoo Shin, 2020. "Obstructive monitoring," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 873-891, October.
    13. M. Martin Boyer, 2004. "Overcompensation as a Partial Solution to Commitment and Renegotiation Problems: The Case of Ex Post Moral Hazard," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 559-582, December.
    14. Aaron Finkle, "undated". "Obstructive Monitoring," Working Papers 14-05, Davidson College, Department of Economics.
    15. Juan I. Beccuti, 2014. "Optimal Selling Mechanisms under Imperfect Commitment: Extending to the Multi-Period Case," Diskussionsschriften dp1402, Universitaet Bern, Departement Volkswirtschaft.
    16. Blume, Andreas, 2012. "A class of strategy-correlated equilibria in sender–receiver games," Games and Economic Behavior, Elsevier, vol. 75(2), pages 510-517.
    17. Kessler, Anke & Lülfesmann, Christoph & Schmitz, Patrick W., 2002. "Optimal Contracting in Agency with Verifiable Ex Post Information," CEPR Discussion Papers 3428, C.E.P.R. Discussion Papers.
    18. Dai Zusai, 2012. "Excess Liquidity against Predation," DETU Working Papers 1201, Department of Economics, Temple University.
    19. Krähmer, Daniel, 2002. "Delegation versus authority [Delegation versus Autorität]," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-26, WZB Berlin Social Science Center.
    20. Juan I. Beccuti, 2014. "Optimal Selling Mechanisms under Imperfect Commitment," Diskussionsschriften dp1401, Universitaet Bern, Departement Volkswirtschaft.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:randje:v:48:y:2017:i:1:p:44-68. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/randdus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.