Monitoring and Collusion: "carrots" versus "sticks" in the Control of Auditors
نویسندگان
چکیده
Monitors can be useful to the principal in controlling the agent. However, in such an hierarchical organizational, monitors will also have an incentive to collude with the agent. We consider a static model where an auditor is hired to monitor an empire building manager. We start by allowing unrestricted and enforceable side-contracting between the manager and the auditor. While this model predicts that the auditor's fees should be contingent upon her report, in practice auditors are largely controlled by the threat of lawsuits rather than direct incentives. A static model does not fit this observation nor the established view of the imperfectness of the auditors' independence. It is also unable to answer a number of interesting questions about collusion. We therefore offer a theory of implicit collusion where the auditor conceals information because of her "career concerns" which arise from the expectation of future rents. This dynamic model predicts that the "stick" of the law combined with a flat fee is a more effective method of control than bonuses. We also show that market structure matters for organizational form, a large scope for monitors may facilitate implicit collusion and that an interesting multiplicity of equilibria is possible. Overall we argue that it is more realistic and informative to explicitly model the forces that may maintain collusion as an equilibrium. JEL Classification: D23, L22
منابع مشابه
Sticking with Carrots and Sticks (Sticking Points Aside): A Response to Ventakapuram, Goldberg, and Forrow
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