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The Maximum Punishment Principle and Precision of Audits under Limited Commitment - Preliminary and Incomplete Version -

Author

Listed:
  • Martin Pollrich

    (Humboldt-Universitaet zu Berlin)

Abstract

For optimal audit contracts the principle of maximum deterrence applies: penalties imposed by the contract are either zero or at their maximal level. Additionally, an imperfect audit technology which reveals the agent’s type only with an error makes the principal worse off. In this paper I show that both statements are no longer true when the principal cannot commit to an audit strategy. Both intermediate penalties and imperfect audits facilitate the creation of incentives for the principal to carry out an audit. Creation Date: 2015-03-18

Suggested Citation

  • Martin Pollrich, "undated". "The Maximum Punishment Principle and Precision of Audits under Limited Commitment - Preliminary and Incomplete Version -," BDPEMS Working Papers 2015004, Berlin School of Economics.
    • Handle: RePEc:bdp:wpaper:2015004
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    File URL: https://repec.berlinschoolofeconomics.de/bdp/wpaper/pdf/WP_2015-04.pdf
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    References listed on IDEAS

    as
    1. Martin Pollrich, 2017. "Mediated audits," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 44-68, March.
    2. Hsiao‐Chi Chen & Shi‐Miin Liu, 2008. "Incentive Contracts Under Imperfect Auditing," Manchester School, University of Manchester, vol. 76(2), pages 131-159, March.
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    Cited by:

    1. Martin Pollrich, 2017. "Mediated audits," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 44-68, March.

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    More about this item

    Keywords

    Auditing; limited commitment; contract theory;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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