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Incentive Contracts Under Imperfect Auditing


Hsiao-Chi Chen


National Taipei University - Department of Economics

Shi-Miin Liu


affiliation not provided to SSRN

Manchester School, Vol. 76, No. 2, pp. 131-159, March 2008

Abstract:     
In this paper we analyze the optimal incentive contracts under imperfect auditing. Both principal's commitment and no commitment to auditing cases are investigated. In the commitment case, the Baron-Besanko-type (RAND Journal of Economics, Vol. 15 (1984), pp. 447-470) contract would fail under imperfect auditing. In the no-commitment case, the Baron-Myerson (Econometrica, Vol. 50 (1982), pp. 911-930) and the Khalil-type (RAND Journal of Economics, Vol. 28 (1997), pp. 629-640) contracts could survive under specific misjudging probabilities. In addition, there exists a separate equilibrium with the agent's full compliance and the principal's sure ex post auditing.

Number of Pages in PDF File: 29

JEL Classification: J33, M49, D82

Accepted Paper Series


Date posted: February 7, 2008  

Suggested Citation

Chen, Hsiao-Chi and Liu, Shi-Miin, Incentive Contracts Under Imperfect Auditing. Manchester School, Vol. 76, No. 2, pp. 131-159, March 2008. Available at SSRN: http://ssrn.com/abstract=1090704 or http://dx.doi.org/10.1111/j.1467-9957.2007.01053.x

Contact Information

Hsiao-Chi Chen (Contact Author)
National Taipei University - Department of Economics ( email )
Taipei
Taiwan
Shi-Miin Liu
affiliation not provided to SSRN
Feedback to SSRN (Beta)


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