Auditing and property rights

Abstract

This is the official published version. Copyright @ 2004 RANDThird-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.The second author used financial support of the Communaute francaise de Belgique (projet ARC 98/03-221) and EU TMR Network contract no. FMRX-CT98-0203