Financial reporting, Conservatism, Auditor-client negotiations, Auditing

This paper explores the role of testing in models of asymmetric information. We demonstrate conditions under which testing for underlying characteristics can overcome adverse selection problems and lead to a full-information competitive equilibrium. This paper provides a more general statement of Mirrlees result on the optimal use of infinite fines. Where testing cannot fully resolve the problems associated with asymmetric information, we outline the source of the difficulties. Our results, developed in the context of a labour market, can be directly extended to other environments. In problems with asymmetric information, testing to discover an agent's chosen action or underlying characteristics may significantly reduce the cost of moral hazard and adverse selection.

We present a new approach to the theory of imperfect competition and apply it to study price competition among differentiated products. The central result provides general conditions under which there exists a pure-strategy price equilibrium for any number of firms producing any set of products. This includes products with multi-dimen- sional attributes. In addition to the proof of existence, we provide conditions for uniqueness. Our analysis covers location models, the characteristics approach, and probabilistic choice together in a unified framework. To prove existence, we employ aggregation theorems due to Prekopa (1971) and Borell (1975). Our companion paper (Caplin and Nalebuff (1991)) introduces these theorems and develops the application to super-majority voting rules. WE PRESENT A NEW APPROACH to the theory of imperfect competition and apply it to study price competition among differentiated products. The central result is that there exists a pure-strategy price equilibrium for any number of firms producing any set of products. In addition to the proof of existence, we provide conditions for uniqueness. Our model both unites diverse strands of the earlier literature and opens up uncharted areas for future analysis. In particular, we expand the traditional one-dimensional framework to allow for multi-dimen- sional product differentiation. Our approach involves twin restrictions on consumer preferences: one on individuals' preferences, the other on the distribution of preferences across society. These are generalizations of the restrictions supporting 64%-majority rule presented in Caplin and Nalebuff (1988). To prove existence, we apply a new technique of aggregation. This technique is valuable in a variety of other problems. In the companion paper, we use the aggregation result to generalize our earlier work on 64%-majority rule and to characterize the relationship between the distribution of human capital and the distribution of income (Caplin and Nalebuff (1991)). There are additional applications in statistics and in search theory. We begin with a brief review of the early literature on imperfect competition, describing in more detail the existence problem and previous solutions. Section 3 presents our twin assumptions, and shows that they cover many standard cases. In Section 4, we introduce the aggregation theorem and use it in the analysis of demand functions. The proof of existence of equilibrium is in Section

A celebrated result of Black (1948a) demonstrates the existence of a simple-majority winner when preferences are single-peaked. The social choice follows the preferences of the median voter: the median voter's most-preferred outcome beats any alternative. However, this conclusion does not extend to elections in which candidates differ in more than one dimension. This paper provides a multi-dimensional analog of the median voter result. We provide conditions under which the mean voter's most preferred outcome is unbeatable according to a 64%-majority rule. The conditions supporting this result represent a significant generalization of Caplin and Nalebuff (1988). The proof of our mean voter result uses a mathematical aggregation theorem due to Prekopa (1971, 1973) and Borell (1975). This theorem has broad applications in economics. An application to the distribution of income is described at the end of this paper; results on imperfect competition are presented in the companion paper, Caplin and Nalebuff (1991).

Many electoral rules require a super-majority vote to change the status quo. Without some restriction on preferences, super-majority rules have paradoxical properties. For example, electoral cycles are possible with anything other than 100 percent majority rule. The auth ors show that these problems do not arise if there is sufficient simi larity of attitudes among the voting population. Their definition of social consensus involves two restrictions on domain: one on individu al preferences, the other on the distribution of preferences. When th is consensus exists, 64 percent majority rule has many desirable prop erties, including the elimination of all electoral cycles. Copyright 1988 by The Econometric Society.

This paper presents the tale of a replication experiment. The main characters are operating systems, Hessians, scaling, double-peaked likelihoods, and the limits of PC computing. Some of these characters, especially the Hessians, looked scary at first, but turned out to be sheep in wolves’ clothing. In other words, the story has a happy ending. To appreciate the twists and turns, we go back and start at the beginning. Once upon a time, indeed, in the June 2003 issue of the AER, B. D. McCullough and H. D. Vinod (2003; “MV” hereafter) set out to test the AER replication policy. While many AER authors were invited to participate in this replication event, few answered the call. We did. MV singled out our cooperation and honoring of the AER replication policy. MV replicated the results in our 1999 AER paper (Shachar and Nalebuff, 1999). You might have expected that we would be happy. But we were not. MV were concerned not only with replication but also with reliability of nonlinear estimation procedures. Specifically, they were concerned that nonlinear solvers can produce inaccurate answers. They believe that this is a systemic problem with empirical research in economics. Thus, they proposed a four-step method to verify the solution from a nonlinear solver. Using data from our paper to illustrate their point they conclude (referring to our 1999 article as “SN”):