Auditing and Property Rights
Volume: Volume 35, No. 2
Issue: Summer 2004
Pages: 356-372
Authors: Elisabetta Iossa and Patrick Legros
Title: Auditing and Property Rights
Abstract: Third-party audit provides incentives to an agent whose actions affect the value of an asset. When audit intensity and outcome are unverifiable, we show that with interim-participation constraints the optimal mechanism may use only the auditor's report, disregarding the agent's information. Furthermore, the auditor obtains the asset and the agent a monetary compensation, when a high asset value is reported. This suggests regulating renewable resources or utility networks by giving entrants the option to buy the right to use the asset at a predetermined price, and financially rewarding incumbents for good performance.