Lynda Thoman

Discussion of Contracting Frictions, Regulation, and the Structure of CPA Firms

Using an agency framework the paper models a client firm that requires both auditing and management advisory services (MAS). The agency problem is due to an asymmetry of information about the costs of providing the services since the clients incumbent accountant is the only party with this knowledge. The standard agency framework is expanded to give the client as well as the incumbent accountant access to competitive markets for both services; hence, the incumbents informational advantage is partially offset by the clients ability to purchase the same service from an outside source. Finally, the client is allowed to bundle his purchases of the two services; i.e., he can write contracts offering a single fee in exchange for specified quantities of both services. The paper demonstrates that (1) the client may be better off if he can write a bundling contract in place of separate contracts for each service, i.e., bundling results in an endogenous form of economies of scope; (2) regulations which impose lower bounds on the level of audit services may reduce the clients profits and hence diminish the magnitude of the economies of scope effect; (3) if there exists a public signal which is correlated with the incumbent accountants information, the first-best outcome can be attained; (4) given the public signal, we may return to a second-best world if regulations impose limits on the types of contracts that can be written; and (5) regulation of one market may affect the quantities of both services purchased.

Capacity Choice and Duopoly Incentives for Information Sharing

We examine a three-stage game in which duopolists face a random-demand intercept. Firms first choose capacities, then decide whether to commit to share the private information they will receive about the intercept. After the private information is observed, firms choose output levels. The costless capacity-limiting case of our model is equivalent to standard models. We show that even small capacity costs may reverse the incentives to share information and lead to equilibria in which information sharing occurs. At some capacity-cost levels, sharing is an equilibrium for conventional reasons (equal expected outputs but higher variance with sharing), while at other cost levels, it is an equilibrium because expected outputs are lower (and, hence, expected prices are higher) with sharing.

Agency in a market setting

This paper examines a market in which a continuum of principals and agents interact in a game. Principals offer contracts while agents decide on sets of acceptable contracts. A mechanism from a class satisfying “efficiency,” “unbiasedness,” and “continuity” properties then matches principals and agents. With risk neutral agents, when the contribution of principals and agents to the total “gains from trade” in a pairing are additively separable, the equilibria of the game coincide with the competitive equilibria for the market. In particular, all contracts used in Nash equilibrium induce first-best effort levels. Both principals and agents have exogenous opportunities outside this market. In equilibrium, agents have endogenously determined outside opportunities available from employment by another principal, and this may be the binding participation constraint in a principal-agent pairing. The results are extended to special non-separable cases and to the case of identical risk averse agents.

Strict liability and negligence rules when the product is information

Abstract If the product is information, a strict liability rule is never efficient while a negligence rule sometimes is; nevertheless, in some cases society is better off with a strict liability rule. First best actions can only be determined given the set of feasible judicial/regulatory institutions.