Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If you need an accessible version of this item please contact JSTOR User Support

Regulation, Asymmetric Information, and Auditing

David P. Baron and David Besanko
The RAND Journal of Economics
Vol. 15, No. 4 (Winter, 1984), pp. 447-470
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555518
Page Count: 24
  • Read Online (Free)
  • Download ($24.00)
  • Subscribe ($19.50)
  • Cite this Item
If you need an accessible version of this item please contact JSTOR User Support
Regulation, Asymmetric Information, and Auditing
Preview not available

Abstract

This article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator. By auditing at a cost, however, the regulator is assumed to be able to observe the realized cost of the firm. If the regulator "finds" that the firm had misrepresented its costs at the time at which prices were set, he can order a refund to consumers. In the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the audit finds that realized costs are lower than anticipated, given the original report. A separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision. The auditing decision, however, depends on the price that was initially set. The optimal auditing strategy is characterized and the nature of the welfare gains are identified. The methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable.

Page Thumbnails

  • Thumbnail: Page 
447
    447
  • Thumbnail: Page 
448
    448
  • Thumbnail: Page 
449
    449
  • Thumbnail: Page 
450
    450
  • Thumbnail: Page 
451
    451
  • Thumbnail: Page 
452
    452
  • Thumbnail: Page 
453
    453
  • Thumbnail: Page 
454
    454
  • Thumbnail: Page 
455
    455
  • Thumbnail: Page 
456
    456
  • Thumbnail: Page 
457
    457
  • Thumbnail: Page 
458
    458
  • Thumbnail: Page 
459
    459
  • Thumbnail: Page 
460
    460
  • Thumbnail: Page 
461
    461
  • Thumbnail: Page 
462
    462
  • Thumbnail: Page 
463
    463
  • Thumbnail: Page 
464
    464
  • Thumbnail: Page 
465
    465
  • Thumbnail: Page 
466
    466
  • Thumbnail: Page 
467
    467
  • Thumbnail: Page 
468
    468
  • Thumbnail: Page 
469
    469
  • Thumbnail: Page 
470
    470