Auditing and Property Rights

Elisabetta Iossa and Patrick Legros

RAND Journal of Economics, 2004, vol. 35, issue 2, 356-372

Abstract: Third-party audit provides incentives to an agent whose actions affect the value of an asset. When audit intensity and outcome are unverifiable, we show that with interim-participation constraints the optimal mechanism may use only the auditor's report, disregarding the agent's information. Furthermore, the auditor obtains the asset and the agent a monetary compensation, when a high asset value is reported. This suggests regulating renewable resources or utility networks by giving entrants the option to buy the right to use the asset at a predetermined price, and financially rewarding incumbents for good performance.

Date: 2004
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