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Publication - Professor In-Uck Park

    The market for liars

    Reputation and auditor honesty

    Citation

    McLennan, A & Park, I-U, 2016, ‘The market for liars: Reputation and auditor honesty’. International Journal of Economic Theory , vol 12., pp. 49?66

    Abstract

    In the model there are two types of nancial 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 oered by clients for fear of losing
    reputation, while "disreputable" auditors accept bribes because even persistent
    refusal will not create an improved reputation. Such an equilibrium may fail
    to exist because competition among reputable auditors drives fees below the
    level at which refusing bribes is optimal. Sustaining such an equilibrium requires both that entry into the reputable segment is impossible or unprotable,
    and also that the reputable segment is prevented from expanding past the point
    where the equilibrium collapses.

    Full details in the University publications repository