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Auditing Policies and Information Systems in Principal-Agent Analysis

Marie-Cecile Fagart and Bernard Sinclair-Desgagné

CIRANO Working Papers from CIRANO

Abstract: This paper considers the information systems induced by auditing policies in a principal-agent model with moral hazard. We point out that two such information systems A and B are seldom comparable using the customary mean-preserving spread relation between their respective likelihood ratio distributions. We offer a general extension of this criterion, however, and we use it to show that, provided the sign of the third derivative of the agent's inverse utility function is constant, it is yet often possible to rank A against B because one of the corresponding likelihood ratio distributions dominates the other in the third order. The upshot is that the design of optimal auditing policies involves not only the well-known tradeoff between risk-sharing and incentives, but also an examination of the location of risk. Cet article traite des mesures de la performance qui sont induites par les politiques optimales d'audit, dans un modèle principal-agent avec aléa moral. Nous faisons d'abord remarquer que deux mesures A et B sont rarement comparables selon l'étalement (en anglais "mean-preserving spread"") de la distribution de leur ratio de vraisemblance respectif. Nous offrons toutefois une généralisation de ce critère usuel, que nous utilisons pour montrer que, si le signe de la troisième dérivée de l'inverse de la fonction d'utilité de l'agent est constant, alors il est possible de comparer A et B parce que l'une des distributions de ratio de vraisemblance qui leur sont associées domine l'autre au sens de la dominance stochastique du troisième ordre. La conséquence pratique de ce résultat est que le design des politiques optimales d'audit nécessite non seulement l'arbitrage bien connu entre incitations et assurance, mais aussi l'examen des risques contingents."

Keywords: Principal-agent; moral hazard; audits; prudence; likelihood ratio distribution; third-order stochastic dominance; Principal-agent; aléa moral; audits; prudence; distribution du ratio de vraisemblance; dominance stochastique du troisième ordre (search for similar items in EconPapers)
Date: 2002-02-01
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