Samurai Accountant: A Theory of Auditing and Plunder

A risk-neutral principal wishes to exact a payment from a risk-neutral agent whose wealth he does not know, but may verify thro ugh a costly auditing procedure. The authors characterize efficient s chemes for the principal when he is allowed to choose schedules for p reaudit and postaudit payments and audit probabilities. Efficient sch emes involve preaudit payments, which are increasing in the agents's wealth; audit probabilities are decreasing in the agent's wealth and satisfy certain constraints as equalities. Such schemes involve stoch astic auditing and rebates after an audit. Copyright 1987 by The Review of Economic Studies Limited.