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Mediated audits

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  • Martin Pollrich

Abstract

I study the optimal audit mechanism when the principal cannot commit to an audit strategy. Invoking a relevation principle, the agent reports her type to a mediator whi assigns contracts and recommends the principla whether to audit. For each reported type the mediator randomizes over a base-contract and the audit contract, accompanied by a recommendation to audit. For large penalties the optimal mechanism uses strictly more contracts than types and cannot be implemented via offering a menu of contracts. The analysis provides a proper benchmark for studying auditing under limited commitment and sheds new light on the usefulness of mediation in contracting and on the design of optimal mechanisms.
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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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    References listed on IDEAS

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    1. Vasiliki Skreta, 2000. "Sequentially Optimal Mechanisms," Econometric Society World Congress 2000 Contributed Papers 1521, Econometric Society.
    2. Helmut Bester & Roland Strausz, "undated". "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
    3. Kim C. Border & Joel Sobel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 525-540.
    4. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
    5. 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.
    6. Martin Pollrich, 2015. "The Maximum Punishment Principle and Precision of Audits under Limited Commitment - Preliminary and Incomplete Version -," Working Papers 2015004, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
    7. 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.
    8. 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.
    9. 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.
    10. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    11. 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.
    12. Barry Nalebuff & David Scharfstein, 1987. "Testing in Models of Asymmetric Information," Review of Economic Studies, Oxford University Press, vol. 54(2), pages 265-277.
    13. 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. Gretschko, Vitali & Wambach, Achim, 2017. "Contract Design With Limited Commitment," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168269, Verein für Socialpolitik / German Economic Association.
    2. 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.
    3. Gretschko, Vitali & Wambach, Achim, 2017. "Contract Design With Limited Commitment," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168269, Verein für Socialpolitik / German Economic Association.
    4. Martin Pollrich, 2015. "The Maximum Punishment Principle and Precision of Audits under Limited Commitment - Preliminary and Incomplete Version -," Working Papers 2015004, Berlin Doctoral Program in Economics and Management Science (BDPEMS).

    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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