Bounding the Benefits of Stochastic Auditing: The Case of Risk-Neutral Agents

Posted: 17 Sep 1999

See all articles by Christopher M. Snyder

Christopher M. Snyder

Dartmouth College - Department of Economics

Abstract

In the context of a costly-state-verification model with a risk-neutral agent having limited liability, it has been postulated that allowing stochastic auditing reduces the asymmetric information problem to a trivial one: i.e., the first best can be approached arbitrarily closely with feasible contracts. This paper proves the postulate to be false: the surplus from feasible contracts is bounded strictly below the first-best surplus level. The bound is straightforward to compute in examples. The paper thus removes a justification for the restriction to deterministic auditing commonly made in the literature.

JEL Classification: D82, D20, G20, H26

Suggested Citation

Snyder, Christopher M., Bounding the Benefits of Stochastic Auditing: The Case of Risk-Neutral Agents. Available at SSRN: https://ssrn.com/abstract=176560

Christopher M. Snyder (Contact Author)

Dartmouth College - Department of Economics ( email )

301 Rockefeller Hall
Hanover, NH 03755
United States
(603) 646-0642 (Phone)
(603) 646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~csnyder/

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
510
PlumX Metrics