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Please use this identifier to cite or link to this item: http://hdl.handle.net/11299/55888

Title: The Market for Liars: Reputation and Auditor Honesty
Authors: McLennan, Andrew
Park, In-Uck
Keywords: M41
Issue Date: Jun-2003
Publisher: Center for Economic Research, Department of Economics, University of Minnesota
Citation: McLennan, A. and Park, I., (2003), "The Market for Liars: Reputation and Auditor Honesty", Discussion Paper No. 321, Center for Economic Research, Department of Economics, University of Minnesota.
Series/Report no.: Discussion Paper
Abstract: In the model there are two types of financial auditors with identical technology, one of which is endowed with a prior reputation for honesty. We characterize conditions under which there exists a "two-tier equilibrium" in which "reputable" auditors refuse bribes offered by clients for fear of losing reputation, while "disreputable" auditors accept bribes because even persistent refusal does not create a good reputation. The main findings are: (a) honest auditors charge higher fees, and have economic profits accruing to reputation; (b) as the fraction of auditors who are honest increases, the premium charged by reputable auditors eventually decreases, which diminishes the incentive to refuse bribes; (c) if the fraction of honest auditors exceeds an upper bound, there does not exist a two-tier equilibrium; (d) thus the reputation mechanism may be undermined by entry into the honest segment of the industry, if it is possible; (e) increasing auditor independence increases the upper bound.
URI: http://purl.umn.edu/55888
Appears in Collections:Discussion Papers

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