Template-Type: ReDIF-Paper 1.0
Author-Name: Jacopo Bizzotto
Author-Name-First: Jacopo
Author-Name-Last: Bizzotto
Author-Workplace-Name: Oslo Business School - OsloMet
Author-Name: Alessandro De Chiara
Author-Name-First: Alessandro
Author-Name-Last: De Chiara
Author-Workplace-Name: Central European University (CEU) - Department of Economics; University of Barcelona; University of Barcelona - Barcelona Economic Analysis Team (BEAT)
Title: Frequent audits and honest audits
Abstract: A regulator hires an auditor to inspect a firm. Audits serve two purposes: to detect violations and to motivate the firm to invest in compliance. Auditor and firm can collude to hide violations. Honest audits require sufficient monetary incentives for the auditor, and more frequent audits call for larger incentives. We link the optimal audit frequency to the budget constraint faced by the regulator, and to the firm's bargaining power in the collusive agreement. We show that (i) the optimal audit frequency need not be monotonic in the regulator's budget size, (ii) tolerating collusion can foster ex-ante investment, and (iii) a regulator that enjoys more flexibility in designing the auditor's compensation scheme might be less willing to deter corruption.
Classification-JEL: D73, K42, L51
Creation-Date: 2022-02-17
File-URL: https://doi.org/10.2139/ssrn.4037316
File-Format: text/html
DOI: 10.2139/ssrn.4037316
Keywords: Auditing, corruption, information design, regulation
Handle: RePEc:oml:wpaper:202202