[Regulatory bodies that oversee the provision of audit services have recently expressed concern about the common practice of pricing initial audits significantly below cost (lowballing). Specifically, it is feared that lowballing could weaken auditor independence and reduce audit quality, since lowballing could provide clients with a credible threat of terminating incumbent auditors should they refuse accounting concessions. However, Magee and Tseng (1990) have shown that when auditors possess all bargaining power and there is no disagreement among auditors on the proper interpretation of GAAP, clients have nothing to gain by threatening termination of incumbent auditors and there is no weakening of auditor independence. Therefore, the concern expressed by regulators must presuppose that clients (i) possess bargaining power superior to that of auditors, and (ii) are free to change auditors at any time. But, if these features are true, it is puzzling why lowballing would occur in the first place. Lowballing can only occur if there are rents to be earned by auditors (DeAngelo 1981a), but such rents seem to be inconsistent with clients possessing most of the bargaining power (Dye 1991; Magee and Tseng 1990). We construct and analyze an economic model of audit pricing which shows how equilibrium audit prices would sustain rents and lowballing even when clients have most or all of the bargaining power and are free to change auditors every period. Our analysis also throws light on the related phenomenon of auditor turnover, and shows that the efficient pricing of audit services by itself precipitates some turnover apart from any turnover due to other forces such as client-auditor disagreements (Dye 1991) and client-auditor matching (Gigler and Penno 1993). Given auditor turnover, we analyze how audit prices, lowballing, and turnover rates evolve over time.]

Abstract. In this paper we study a two‐person firm consisting of a principal and an agent. The principal hires the agent to provide some input into the production process. The output of the production process is determined by the agent's input and an exogenous state realization. Subsequent to joining the firm, but prior to choosing his input, the agent privately observes the state realization. The principal employs an imperfect monitoring system that publicly reports on the state realization. Our purpose in studying this model is to better understand the effects of monitoring on the design of the optimal employment contract and the determinants of the value of monitoring in a model with asymmetric information. Résumé. Les auteurs étudient une entreprise constituée de deux personnes, un mandant et un mandataire. Le mandant embauche le mandataire pour sa contribution au processus de fabrication. Le résultat du processus de fabrication est déterminé par la contribution du mandataire et par la réalisation d'un état exogène. Après s'être joint à l'entreprise, mais avant de déterminer quelle sera sa contribution, le mandataire observe, en privé, la réalisation de cet état exogène. Le mandant a recours à un système de suivi imparfait qui fait le point, à l'intention du public, sur la réalisation de l'état en question. L'étude de ce modèle permet une meilleure compréhension des conséquences du suivi sur la nature de contrat d'emploi optimal et des déterminants de la valeur du suivi dans un modèle caractérisé par une information asymétrique.

We develop a model of currency crises, in which traders are heterogeneously informed, and interest rates are endogenously determined in a noisy rational expectations equilibrium. In our model, multiple equilibria result from distinct roles an interest rate plays in determining domestic asset market allocations and the devaluation outcome. Except for special cases, this finding is not affected by the introduction of noisy private signals. We conclude that the global games results on equilibrium uniqueness do not apply to market-based models of currency crises.

Abstract Analyzes audit pricing, lowballing and auditor turnover services in accounting practices. Insight into audit pricing model; Effect of lowballing to auditor independence; Evolution of audit prices and auditor turnover; Empirical implications.

Chandra Kanodia, Arijit Mukherji, Haresh Sapra, Raghu Venugopalan, Hedge Disclosures, Future Prices, and Production Distortions, Journal of Accounting Research, Vol. 38, Supplement: Studies on Accounting Information and the Economics of the Firm (2000), pp. 53-82