2017/02/07 by Martin Pollrich
Business, Management and Accounting · Decision Sciences · Economics, Econometrics and Finance · #Auction Theory and Applications #Law, Economics, and Judicial Systems #Supply Chain and Inventory Management
paper · doi:10.1111/1756-2171.12167
openalex publication_date 2017/02/07 · openalex created_date 2022/05/11 · openalex updated_date 2026/07/29
I study optimal contracting where the principal can verify the agent's private information via auditing but cannot contractually commit to audit frequency. Optimal contracting requires sophisticated communication: the agent reports his information to a mediator, who randomly selects a contract. Mediation allows for fine‐tuning the information flow, because the principal observes the selected contract but not the agent's report. Simply offering a menu of contracts is, in general, not optimal. I characterize optimal mediated contracts, determine conditions for when auditing is profitable, and analyze contractual distortions. Mediated contracts can be implemented via negotiated rulemaking procedures, and potentially via sequential communication.