I report the results of an experiment designed to investigate the influence of noncredible communications and group affiliation on auditors' formation of self-serving bias. I find that manager-subjects use noncredible communications to induce auditors to develop an unwarranted trust of managers (i.e., a biased judgment). However, the bias is neutralized when auditor-subjects belong to groups that create social pressure to conform to group norms. Thus, my finding calls into question the Bazerman et al. (1997) conclusion that auditors cannot conduct impartial audits due to self-serving biases resulting from repeated interactions between auditors and their clients.
Studies the extent to which corporate information senders develop reputations for truthful reporting. Reputation formation; Incentives for voluntary dissemination of information; Buyers' forecasting and bidding strategies.
[This paper presents the results of an experiment designed to investigate the extent to which information senders develop reputations for truthful reporting. The results indicate that senders were more likely to report truthfully when their misrepresentations imposed costs on the receivers of their reports. With repeated interactions, receivers of the reports were able to discern the sender's reporting strategies, but provided no economic reward for truthfulness.]
This paper reports the results of an experiment designed to investigate how legal regimes affect social welfare. We investigate four legal regimes, each consisting of a liability rule (strict or negligence) and a damage measure (out-of-pocket or independent-of-investment). The results of the experiment are for the most part consistent with the qualitative predictions of Schwartz's (1997) model; however, subjects' actual choices deviate from the point predictions of the model. We explore whether these deviations arise because: (1) subjects form faulty anticipations of their counterparts' actions and/or (2) subjects do not choose the optimal responses given their anticipations. We find that subjects behave differently under the four regimes in terms of anticipation errors and departures from best responses. For example, subjects playing the role of auditors anticipate investments most accurately under the regime with strict liability combined with out-of-pocket damages, but are least likely to choose the optimal response given their anticipations. This finding implies that noneconomic factors likely play a role in determining subjects' choices.
Assesses how different regimes of auditor liability affect the demand for and supply of auditing services. Adoption of complex strategies by economic agents; Usefulness of the experimental approach in aiding the understanding of the functioning of auditing markets; Strict liability regime as an alternative by auditors.
[In this study we assess how different regimes of auditor liability affect the demand for and supply of auditing services. The assessment was made with 15 experimental markets, each of which involved two sellers of assets, two auditors (verifiers), and four buyers. The experimental markets paradigm allowed us to compare the negligence liability regime (six markets) that auditors currently face with two alternatives not currently in existence-a strict liability regime (six markets) and a no-liability regime (three markets). We focused on the extent to which the experimental results conformed to our predictions of (1) sellers' frequency of hiring verifiers and of selecting a costly investment that improved aggregate welfare, (2) verifiers' service fees and their frequency of testing the truthfulness of the sellers' disclosures, and (3) buyers' reliance on the sellers' disclosures and verifiers' reports when pricing the sellers' assets. The predictions varied across the liability regimes primarily because differences in the degree of the verifiers' liability changed their economic incentives to test the truthfulness of the sellers' disclosures. The results show that the no-liability and negligence markets operated in a manner consistent with the predictions, whereas the strict markets deviated from the predictions on several dimensions. Specifically, verifiers in the strict liability markets were hired less often than predicted because they submitted higher offers for their services than sellers were willing to pay. This in turn led to fewer than predicted costly investments by the sellers. Although our general conclusion recognizes that a legal system is an integral part of the auditing institutional infrastructure, we found no evidence of any systematic benefits from imposing a strict liability rule on the verification service. In fact, the results suggest that the negligence liability markets operated at a level of economic efficiency as high or higher than those in the other two regimes. This suggests that the current tendencies of courts and the auditing profession to expand the scope of auditors' liabilities may not achieve the net benefits expected from such expansions.]