Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93845
Authors: 
Strausz, Roland
Year of Publication: 
2005
Series/Report no.: 
SFB/TR 15 Discussion Paper 33
Abstract: 
This paper studies the strategic effect of a difference in timing of verification in an agency model. A principal may choose between two equally efficient verification procedures: monitoring and auditing. Under auditing the principal receives additional information. Due to a double moral hazard problem, there exists a tension between incentives for effort and incentives for verification. Auditing exacerbates this tension and, consequently, requires steeper incentive schemes than monitoring. Hence, auditing is suboptimal if 1) steep incentives structures are costly to implement due to bounded transfers, or 2) steep incentive schemes induce higher rents due to limited liability. verification in an agency model. A principal may choose between two equally efficient verification procedures: monitoring and auditing. Under auditing the principal receives additional information. Due to a double moral hazard problem, there exists a tension between incentives for effort and incentives for verification. Auditing exacerbates this tension and, consequently, requires steeper incentive schemes than monitoring. Hence, auditing is suboptimal if 1) steep incentives structures are costly to implement due to bounded transfers, or 2) steep incentive schemes induce higher rents due to limited liability.
Subjects: 
timing of verification
double moral hazard
monitoring
auditi
JEL: 
D82
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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