The endogenous transaction costs of delegated auditing

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Publication Details

Output type: Other

Author list: Faure-Grimaud A, Laffont JJ, Martimort D

Publisher: Elsevier

Publication year: 1999

Journal: European Economic Review (0014-2921)

Volume number: 43

Issue number: 4-6

Start page: 1039

End page: 1048

Number of pages: 10

ISSN: 0014-2921

eISSN: 1873-572X

Languages: English-Great Britain (EN-GB)

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Open access status: closed

Abstract

This paper analyzes the deadweight loss of delegated auditing in a three-tier hierarchy. In a costly-state verification model, this cost depends on the endogenous information structure, the auditor's degree of risk-aversion and the size of the punishment. We identify the optimal contractual outcome of this delegation model with the solution obtained in a standard three-tier hierarchical model of collusive auditor. We then derive from this identification the set of parameters of the physical environment which may affect the efficiency of side-contracting within the firm. (C) 1999 Elsevier Science B.V. All rights reserved.

Keywords

collusion, costly-state verification, delegation, endogenous transaction costs

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