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Auditing Without Commitment

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  • Fahad Khalil

Abstract

I study the optimal contract when a principal cannot commit to an audit. The contract must provide incentives for the agent to comply as well as for the principal to audit. The key tradeoff is efficiency versus noncompliance instead of the familiar rent versus efficiency. Information rent is zero whether production cost is high or low. For high production cost, the agent is asked to produce greater than the amount under full information. The probability of audit is higher when the principal cannot commit compared to when he can.

Suggested Citation

  • Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
  • Handle: RePEc:rje:randje:v:28:y:1997:i:winter:p:629-640
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