We analyze theoretically and empirically the effect of preference policies, which favor some auditors over others for reasons unrelated to the audit. For example, an auditee may prefer minority-owned auditors, all else equal. We construct an analytical model of the competitive bidding process for audit services. We show that preference policies can sometimes improve the audit procurement process by encouraging price concessions from non-preferenced auditors. We test model predictions in a setting amenable to empirical identification of preference; many municipalities prefer local firms over more distant firms. We find strong evidence of local preference, with local firms earning a 13 percent fee premium over non-local firms. We show that audit fees depend not only on the winning firm's capabilities but also crucially on the winning firm's incremental capabilities over the next best alternative. Lastly, we identify conditions under which preference policies benefit audit procurement outcomes. JEL Classification: M42, D44, M48, H83 Key words: audit markets, auditor selection, competitive bidding, local preference
|Date of creation:||Feb 2012|
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- Burguet Roberto & Perry Martin K, 2007.
"Bribery and Favoritism by Auctioneers in Sealed-Bid Auctions,"
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- repec:bla:joares:v:28:y:1990:i:1:p:198-210 is not listed on IDEAS
- Todd Kaplan & Shmuel Zamir, 2012. "Asymmetric first-price auctions with uniform distributions: analytic solutions to the general case," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(2), pages 269-302, June.
- Roberto Burguet & Martin K. Perry, 2009. "Preferred suppliers in auction markets," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 283-295.
- Roberto Burguet & Martin K. Perry, 2008. "Preferred Suppliers in Auction Markets," Working Papers 355, Barcelona Graduate School of Economics.
- Roberto Burguet & Martin K. Perry, 2008. "Preferred Suppliers in Auction Markets," UFAE and IAE Working Papers 752.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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