The market for liars: Reputation and auditor honesty

We model the coexistence of two types of financial auditors who have identical technology but different reputation: “reputable” auditors refuse bribes offered by clients for fear of losing reputation, while “disreputable” auditors accept bribes because even persistent refusal will not create an improved reputation. Such an equilibrium may fail to exist because competition among reputable auditors drives fees below the level at which refusing bribes is optimal. Sustaining such an equilibrium requires both that entry into the reputable segment is impossible or unprofitable, and also that the reputable segment is prevented from expanding past the point where the equilibrium collapses.