The endogenous transaction costs of delegated auditing

This paper analyzes the deadweight loss of delegated auditing in a three-ti er hierarchy. In a costly-state verification model, this cost depends on th e endogenous information structure, the auditor's degree of risk-aversion a nd the size of the punishment. We identify the optimal contractual outcome of this delegation model with the solution obtained in a standard three-tie r hierarchical model of collusive auditor. We then derive from this identif ication the set of parameters of the physical environment which may affect the efficiency of side-contracting within the firm. (C) 1999 Elsevier Scien ce B.V. All rights reserved.