Independence and Gatekeeper Effectiveness: An Experiment

Our purpose is to investigate auditor independence by developing a model that includes both financial and nonfinancial incentives and to test this model using an experiment. We develop the Gatekeeper Game: a three player game, where a gatekeeper makes a decision that affects the wealth of two parties (a proposer and a third party) who have conflicting interests. We find that gatekeepers represent third parties as well as these parties represent themselves, even in settings where it is costly to do so. The reason for the gatekeeper’s effective representation is attributed to the gatekeeper’s sense of responsibility in stopping the proposer from making unfair distributions. We also find that when gatekeepers have strong financial independence (i.e., do not face financial loss from rejecting proposals) third party welfare increases; however, it does so at a very high cost to the proposers, thus leading to overall lower social welfare.