Bounding the benefits of stochastic auditing: The case of risk-neutral agents

Christopher Snyder

Economic Theory, 1999, vol. 14, issue 1, 247-253

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.

Keywords: Stochastic; auditing; ·; Costly; state; verification; model; ·; Risk; neutrality. (search for similar items in EconPapers)
JEL-codes: D20 D82 G20 H26 (search for similar items in EconPapers)
Date: 1999-07-08
Note: Received: July 18, 1997; revised version: February 23, 1998
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Citations: View citations in EconPapers (3)

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