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Efficient audits by pooling projects

Anna Maria Menichini () and Peter Simmons

Discussion Papers from Department of Economics, University of York

Abstract: In a costly state verification model under commitment, the paper shows that jointly financing multiple independent projects reduces the deadweight loss of inefficient audits. This is true for both simultaneous and sequential audit, since each system reveals the same information about the project outcomes at the same cost. Moreover, the audit combination under sequential audit is indeterminate. Audits are decreasing in the reported income and, for sufficiently high projects profitability, deterministic for lower income reports. We explore robustness of the results, including commitment issues. The results are interpreted in the light of observed features of financial contracts.

Keywords: contracts; auditing; diversification. (search for similar items in EconPapers)
JEL-codes: D82 D83 D86 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-acc, nep-mic and nep-ppm
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