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Frequent audits and honest audits

Author

Listed:
  • Jacopo Bizzotto

    (Oslo Business School - OsloMet)

  • Alessandro De Chiara

    (Central European University (CEU) - Department of Economics; University of Barcelona; University of Barcelona - Barcelona Economic Analysis Team (BEAT))

Abstract

A regulator hires an auditor to inspect a firm. Audits serve two purposes: to detect violations and to motivate the firm to invest in compliance. Auditor and firm can collude to hide violations. Honest audits require sufficient monetary incentives for the auditor, and more frequent audits call for larger incentives. We link the optimal audit frequency to the budget constraint faced by the regulator, and to the firm's bargaining power in the collusive agreement. We show that (i) the optimal audit frequency need not be monotonic in the regulator's budget size, (ii) tolerating collusion can foster ex-ante investment, and (iii) a regulator that enjoys more flexibility in designing the auditor's compensation scheme might be less willing to deter corruption.

Suggested Citation

  • Jacopo Bizzotto & Alessandro De Chiara, 2022. "Frequent audits and honest audits," Working Papers 202202, Oslo Metropolitan University, Oslo Business School.
    • Handle: RePEc:oml:wpaper:202202
    DOI: 10.2139/ssrn.4037316
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    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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