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Bounding the benefits of stochastic auditing: The case of risk-neutral agents

Author

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  • Christopher M. Snyder

    (Department of Economics, George Washington University, 2201 G Street N.W., Washington, DC 20052, USA)

Abstract

In the context of a costly-state-verification model with a risk-neutral agent having limited liability, it has been postulated that allowing stochastic auditing reduces the asymmetric information problem to a trivial one: i.e., the first best can be approached arbitrarily closely with feasible contracts. This paper proves the postulate to be false: the surplus from feasible contracts is bounded strictly below the first-best surplus level. The bound is straightforward to compute in examples. The paper thus removes a justification for the restriction to deterministic auditing commonly made in the literature.

Suggested Citation

  • Christopher M. Snyder, 1999. "Bounding the benefits of stochastic auditing: The case of risk-neutral agents," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(1), pages 247-253.
    • Handle: RePEc:spr:joecth:v:14:y:1999:i:1:p:247-253
    Note: Received: July 18, 1997; revised version: February 23, 1998
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    Citations

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    Cited by:

    1. David A. Miller & Kareen Rozen, 2011. "Optimally Empty Promises and Endogenous Supervision," Cowles Foundation Discussion Papers 1823, Cowles Foundation for Research in Economics, Yale University, revised Jun 2012.
    2. Tymofiy Mylovanov & Patrick Schmitz, 2008. "Task scheduling and moral hazard," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(2), pages 307-320, November.

    More about this item

    Keywords

    Stochastic auditing · Costly state verification model · Risk neutrality.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D20 - Microeconomics - - Production and Organizations - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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