What question did this study set out to answer?

This research investigates how credibility mechanisms affect market efficiency in auditing services.

June 15, 2026

The Use of Experimental Markets in Auditing Research: Some Initial Findings.

Key Points

This research investigates how credibility mechanisms affect market efficiency in auditing services.
Laboratory experiments were conducted to explore the interaction between sellers and buyers in auditing markets.
The mechanisms evaluated included seller verification and buyer reports to assess asset disclosures.
The focus was on the impact of delayed asset realization feedback on economic efficiencies.
Both credibility mechanisms increased economic efficiencies, addressing moral hazard and adverse selection issues.
Efficiency was not maximized even with the introduction of these mechanisms under delayed feedback conditions.

Abstract

Abstract In this paper we report the results of laboratory experiments designed to investigate the competing demands that sellers and buyers have for credibility generating mechanisms. These demands are investigated as an initial stage of a research program designed to address some fundamental issues related to the demand for auditing services. The mechanism available to the seller is a "verification" mechanism which can be used to verify the truthfulness of the seller's disclosures about the type of asset held for sale. The mechanism available to the buyers is a report which informs all buyers of the type of asset that the seller has for sale. The results from our market settings show that each of these mechanisms individually increase economic efficiencies (reducing moral hazard and adverse selection problems), particularly when asset realization feedback is delayed to the buyers. But even in settings with delayed realization feedback and credibility mechanisms, efficiency is not achieved to the maximum extent possible.

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