Sorting the Good Guys from Bad: On the Optimality of Deterministic Audit with Ex-Ante Information Acquisition

Anna Maria Menichini and Peter Simmons

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: In a costly state verification model under commitment the principal may acquire a costly public and imperfectly revealing signal before or after contracting. If the project remains profitable after all signal realisations, optimally the signal is collected, if at all, after contracting, and it may be acquired randomly or deterministically. Moreover, audit is deterministic and targeted on some signal-state combinations. The paper provides a detailed characterisation of the optimal contract and performs a comparative static analysis of signal acquisition strategy and payoffs with respect to enforcement costs and informativeness of the signal. We explore robustness of the results, including commitment issues.

Keywords: contracts; auditing; ex-ante information (search for similar items in EconPapers)
JEL-codes: D82 D83 D86 (search for similar items in EconPapers)
Date: 2008-07-15, Revised 2012-10-27
New Economics Papers: this item is included in nep-cta
Note: A previous version has been circulated under the title “The Strategic and Social Power of Signal Acquisition".
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Published in Economic Theory, 2014, 57(2), 339-376, under the title "Sorting the Good Guys from Bad: On the Optimal Audit Structure under Ex-ante Information Acquisition"

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Journal Article: Sorting the good guys from bad: on the optimal audit structure with ex-ante information acquisition (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:201

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