Understanding Contract Audits: An Experimental Approach

Tinbergen Institute Discussion Paper 11-031/1

34 Pages Posted: 15 Feb 2011

See all articles by Robert M.M. Bertrand

Robert M.M. Bertrand

affiliation not provided to SSRN

Arthur J. H. C. Schram

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute

Eddy Vaassen

Maastricht University - Department of Accounting and Information Management

Date Written: January 31, 2011

Abstract

Contract audits aimed at reducing information asymmetry and transaction costs are frequently used in imperfect markets such as defense procurement. This contradicts predictions from standard economic theory. We conduct a laboratory experiment to investigate this paradox. Our laboratory setup allows us to investigate the conditions under which individuals decide to initiate a contract audit and to carefully assess its economic value. Our theoretical approach draws upon two distinct literatures. The theory of planned behaviour explains why organizations may engage in contract auditing even when markets are imperfect. Social preference theory explains why traders may adjust prices when a contract audit indicates that the original price yields an inequitable distribution of the surplus. Our results indeed show that audits lead to an increased share of the surplus for the buyer, but this increased welfare is completely offset by the audit costs. To further investigate motivations to initiate contract audits, we measure our subjects' attitudes towards contract auditing and their level of perceived behavioral control; and we manipulate subjective norms about having contract audits done. These treatments show that a positive attitude toward contract auditing, enhanced perceived behavioral control, and pressure to perform a contract audit all lead to more contract audits.

Keywords: contract auditing, experimental economics, value of the audit

JEL Classification: M40, C91

Suggested Citation

Bertrand, Robert M.M. and Schram, Arthur J. H. C. and Vaassen, Eddy, Understanding Contract Audits: An Experimental Approach (January 31, 2011). Tinbergen Institute Discussion Paper 11-031/1, Available at SSRN: https://ssrn.com/abstract=1761220 or http://dx.doi.org/10.2139/ssrn.1761220

Robert M.M. Bertrand (Contact Author)

affiliation not provided to SSRN ( email )

Arthur J. H. C. Schram

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 18
CREED
Amsterdam 1018 WB
Netherlands
+31 (0)20 525 4293 (Phone)

HOME PAGE: http://www.fee.uva.nl/creed/PEOPLE/Arthurs.htm

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Eddy Vaassen

Maastricht University - Department of Accounting and Information Management ( email )

P.O. Box 616
Maastricht NL 6200 MD
Netherlands

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