
handle: 10419/121364
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.
Auditing; limited commitment; mediation; contract theory, 330, ddc:330, contract theory, Auditing, limited commitment, mediation, contract theory, auditing, limited commitment, D82, C72, mediation, D86, jel: jel:D82, jel: jel:C72, jel: jel:D86
Auditing; limited commitment; mediation; contract theory, 330, ddc:330, contract theory, Auditing, limited commitment, mediation, contract theory, auditing, limited commitment, D82, C72, mediation, D86, jel: jel:D82, jel: jel:C72, jel: jel:D86
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