Limiting Auditor Liability? - Experimental Evidence on Risk and Ambiguity Attitudes under Real Losses

43 Pages Posted: 26 Apr 2007 Last revised: 21 Jul 2009

See all articles by Christopher Koch

Christopher Koch

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management

Daniel Schunk

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management; University of Zurich - Department of Economics

Date Written: June 2009

Abstract

This paper is motivated by the current debate on limiting auditor liability. In a laboratory experiment, the effect of limited versus unlimited liability on behavior under risk and ambiguity is investigated for risks involving small probabilities. The amount of liability is manipulated in such a way that subjects can pay with their show-up fee under limited liability, but they can suffer out-of-pocket losses under unlimited liability. Findings are that both risk aversion and ambiguity aversion are higher under unlimited liability than under limited liability, and these two constructs are correlated under unlimited liability. These findings provide new empirical evidence for the intuition that aversion toward risk and ambiguity plays an especially important role in auditor behavior under unlimited liability. Our experimental results emphasize the importance of considering risk and ambiguity attitudes in economic models on liability, especially when liability regimes are compared that differ in liability limits or ambiguity.

Keywords: risk aversion, ambiguity aversion, experimental economics, auditor liability

JEL Classification: C91, D81, M42

Suggested Citation

Koch, Christopher and Schunk, Daniel, Limiting Auditor Liability? - Experimental Evidence on Risk and Ambiguity Attitudes under Real Losses (June 2009). Available at SSRN: https://ssrn.com/abstract=982027 or http://dx.doi.org/10.2139/ssrn.982027

Christopher Koch (Contact Author)

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management ( email )

Mainz
Germany
+49 (6131) 3929990 (Phone)

HOME PAGE: http://https://www.cg.bwl.uni-mainz.de/

Daniel Schunk

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management ( email )

Mainz
Germany

University of Zurich - Department of Economics ( email )

Bluemlisalpstr. 10
Zurich, 8006
Switzerland

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