Date of Award

8-2009

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Economics

Major Professor

Rudy Santore

Committee Members

William Neilson, Christian Vossler, Phillip Daves

Abstract

In this dissertation, I examine the effect of statutory regimes on two common decisions made by market agents that are characterized by information asymmetries. For each decision, specifically, the decision to engage in accounting fraud by firm managers and the choice of contract to offer legal representation, a theoretical model is used to offer predictions which are then tested using laboratory experiments.

Chapter I examines the effects of Sarbanes-Oxley provisions pertaining to whistle-blower protections and reporting requirements on a managerial team’s incentive to commit accounting fraud. Analysis predicts that whistle-blowing does not occur in equilibrium, but that the whistle-blower protections combined with the reporting requirements can reduce fraud, and are most likely to do so when managers are heterogeneous in their aversion to sanctions. Interestingly, amnesty provisions have no effect on the equilibrium level of fraud. In line with previous literature, equity compensation induces managerial effort, but also provides the incentive for management to fraudulently misreport the financial health of the firm.

Chapter II discusses the results of an experimental test of the theory and finds that whistle-blowing does occur in part due to coordination failures among members of the team. The out-of-equilibrium behavior from which whistle-blowing results renders the theoretical prediction that amnesty does not matter to be moot, and analysis shows that whistle-blowing decreases the amount of fraud that goes undetected by authorities, and that this effect is magnified by amnesty provisions. Otherwise, the experiments yield strong support for the theoretical predictions of the model.

Chapter III uses a theoretical model and experimental test to consider the possibility that contingent fees may improve the quality of legal services by allowing clients to screen low-quality attorneys. The model suggests that caps on contingent fees may reduce the average quality of legal representation by allowing low-quality attorneys to remain in the market and decrease client welfare by allowing attorneys to earn rents. Experimental evidence provides support for these predictions, showing that client welfare and screening decrease as caps become more stringent, even if the caps are not do not prevent screening.

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