The Maximum Punishment Principle and Precision of Audits under Limited Commitment - Preliminary and Incomplete Version -

Martin Pollrich

No 2015004, BDPEMS Working Papers from Berlin School of Economics

Abstract: For optimal audit contracts the principle of maximum deterrence applies: penalties imposed by the contract are either zero or at their maximal level. Additionally, an imperfect audit technology which reveals the agent’s type only with an error makes the principal worse off. In this paper I show that both statements are no longer true when the principal cannot commit to an audit strategy. Both intermediate penalties and imperfect audits facilitate the creation of incentives for the principal to carry out an audit. Creation Date: 2015-03-18

Keywords: Auditing; limited commitment; contract theory (search for similar items in EconPapers)
JEL-codes: C72 D82 D86 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-cta, nep-gth and nep-law
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