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The Role of Bargaining Initiative Under no Commitment to Audit

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Abstract

This paper addresses the issue of the optimal contract design under costly state verification and no commitment to auditing when the contract offer comes from the uninformed party. Contrary to similar frameworks and to cases where the informed party retains the bargaining power, we find that the optimal contract is characterised neither by truth telling nor by mixed strategy equilibria. Depending on endogenous revenues and observation cost, a pooling equilibrium with either deterministic or random auditing occurs.

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  • A. Menichini, 2001. "The Role of Bargaining Initiative Under no Commitment to Audit," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(3), pages 303-312, August.
    • Handle: RePEc:bla:scotjp:v:48:y:2001:i:3:p:303-312
    DOI: 10.1111/1467-9485.00200
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    Cited by:

    1. Anna Maria C. Menichini, 2008. "Third Parties, Information Disclosure And Monitoring Incentives," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(1), pages 31-50, February.
    2. Annamaria Menichini, 2000. "Third parties as an incentive to comply," CSEF Working Papers 41, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jan 2006.

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