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Mediated audits
Author(s) -
Pollrich Martin
Publication year - 2017
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12167
Subject(s) - commit , audit , principal (computer security) , private information retrieval , mediation , rulemaking , business , information flow , computer science , accounting , computer security , database , linguistics , philosophy , political science , law
I study optimal contracting where the principal can verify the agent's private information via auditing but cannot contractually commit to audit frequency. Optimal contracting requires sophisticated communication: the agent reports his information to a mediator, who randomly selects a contract. Mediation allows for fine‐tuning the information flow, because the principal observes the selected contract but not the agent's report. Simply offering a menu of contracts is, in general, not optimal. I characterize optimal mediated contracts, determine conditions for when auditing is profitable, and analyze contractual distortions. Mediated contracts can be implemented via negotiated rulemaking procedures, and potentially via sequential communication.