Bounding the benefits of stochastic auditing: The case of risk-neutral agents
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.
Volume (Year): 14 (1999)
Issue (Month): 1 ()
|Note:||Received: July 18, 1997; revised version: February 23, 1998|
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