Optimal audit policies with correlated types
M. Martin Boyer () and
Patrick Gonzalez ()
Economic Theory, 2004, vol. 24, issue 2, 325-334
Abstract:
We propose a version of Townsend’s [17] model of costly audits where the agents’ types are correlated. Audits are used because agents have a limited ability to bear risk so that the Full Surplus Extraction (FSE) scheme á la Crémer and McLean [5,6] and McAfee and Reny [13] are suboptimal. It is shown that Townsend’s result is a special case of our model when agent types are uncorrelated. The performed numerical simulation of the model using two agents and two types offers interesting insights into what we call the Townsend Ridge. Indeed, the optimal contract which specifies wages to be paid and the audit strategy are remarkably different from one side of the ridge to the next. The observed discontinuity at the ridge reflects a discreet change from a single to a dual audit policy. Copyright Springer-Verlag Berlin/Heidelberg 2004
Keywords: Audits; Asymmetric information; Correlated information; Costly state verification; Townsend ridge (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)
Downloads: (external link)
http://hdl.handle.net/10.1007/s00199-003-0435-7 (text/html)
Access to full text is restricted to subscribers.
Related works:
Working Paper: Optimal Audit Policies with Correlated Types (2000) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:24:y:2004:i:2:p:325-334
Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2
DOI: 10.1007/s00199-003-0435-7
Access Statistics for this article
Economic Theory is currently edited by Nichoals Yanneils
More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().