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Efficient audits by pooling projects

Author

Listed:
  • Anna Maria C. Menichini
  • Peter J. Simmons

Abstract

In a costly state verification model under commitment, the paper shows that jointly financing multiple independent projects reduces the deadweight loss of inefficient audits. This is true for both simultaneous and sequential audit, since each system reveals the same information about the project outcomes at the same cost. Moreover, the audit combination under sequential audit is indeterminate. Audits are decreasing in the reported income and, for sufficiently high projects profitability, deterministic for lower income reports. We explore robustness of the results, including commitment issues. The results are interpreted in the light of observed features of financial contracts.

Suggested Citation

  • Anna Maria C. Menichini & Peter J. Simmons, 2017. "Efficient audits by pooling projects," Discussion Papers 17/19, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:17/19
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    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/2017/1719.pdf
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    References listed on IDEAS

    as
    1. Kim C. Border & Joel Sobel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 525-540.
    2. Menichini Anna Maria C. & Simmons Peter J., 2006. "Liars and Inspectors: Optimal Financial Contracts When Monitoring is Non-Observable," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-19, June.
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    More about this item

    Keywords

    contracts; auditing; diversification.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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