Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/287444 
Authors: 
Year of Publication: 
2021
Citation: 
[Journal:] Review of Accounting Studies [ISSN:] 1573-7136 [Publisher:] Springer US [Place:] New York, NY [Year:] 2021 [Pages:] 1-34
Publisher: 
Springer US, New York, NY
Abstract: 
This paper studies the effect of timing and commitment of verification in a principal-agent relationship with moral hazard. To acquire additional information about the agent's behavior, the principal possesses a costly technology that produces a noisy signal about the agent's effort choice. The precision of this signal is affected by the principal's verification effort. Two verification procedures are discussed: monitoring where the principal verifies the agent's behavior simultaneously with his effort choice and auditing where the principal can condition her verification effort on the realized outcome. As it is well known, the principal prefers to audit the agent's behavior if she can commit to her verification effort at the time of contracting. The main contribution of this paper is to highlight the importance of commitment by the principal to her verification effort. In particular, I show that, when the principal cannot commit to her verification effort ex-ante, the principal strictly prefers monitoring to auditing if the gains from choosing high effort are sufficiently high.
Subjects: 
Monitoring
Auditing
Commitment
Double moral hazard
JEL: 
D82
D86
M42
M52
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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