Auditor liability rules under imperfect information and costly litigation : the welfare increasing effect of liability insurance

  • This paper examines auditor liability rules under imperfect information, costly litigation and risk averse auditors. A negligence rule fails in such a setting, because in equilibrium auditors will deviate with positive probability from any given standard. It is shown that strict liability outperforms negligence with respect to risk allocation, and the probability that a desired level of care is met by the audi tor if competitive liability insurance markets exist. Furthermore, our model explains the existence of insurance contracts containing obligations - a type of contract often observed in liability insurance markets.

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Author:Ralf Ewert, Eberhard Feess, Martin Nell
Parent Title (German):Universität Frankfurt am Main. Fachbereich Wirtschaftswissenschaften: [Working paper series / Finance and accounting] Working paper series, Finance & Accounting ; No. 28
Series (Serial Number):Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting (28)
Publisher:Johann Wolfgang Goethe-Universität, Fachbereich Wirtschaftswissenschaften
Place of publication:Frankfurt am Main
Document Type:Working Paper
Date of Publication (online):2022/05/02
Year of first Publication:1999
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2022/05/02
Tag:auditor liability; liability insurance; risk allocation
Page Number:21
Last Page:15
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht