Boccard Legros Audit Competition CEPR DP3478

DISCUSSION PAPER SERIES



ZZZFHSURUJ

Available online at:www.cepr.org/pubs/dps/DP3478.aspwww.ssrn.com/xxx/xxx/xxx

No. 3478

AUDIT COMPETITION ININSURANCE OLIGOPOLIES

Nicolas Boccard and Patrick Legros

INDUSTRIAL ORGANIZATION

ISSN 0265-8003

AUDIT COMPETITION ININSURANCE OLIGOPOLIES

Nicolas Boccard,

Universitat de Girona

Patrick Legros, ECARES,

Université Libre de Bruxelles and CEPRDiscussion Paper No. 3478July 2002

Centre for Economic Policy Research

90

–

98 Goswell Rd, London EC1V 7RR, UKTel: (44 20) 7878 2900, Fax: (44 20) 7878 2999Email: cepr@cepr.org, Website: www.cepr.orgThis Discussion Paper is issued under the auspices of the Centre

’

s researchprogramme in

INDUSTRIAL ORGANIZATION

. Any opinions expressed hereare those of the author(s) and not those of the Centre for Economic PolicyResearch. Research disseminated by CEPR may include views on policy, butthe Centre itself takes no institutional policy positions.The Centre for Economic Policy Research was established in 1983 as aprivate educational charity, to promote independent analysis and publicdiscussion of open economies and the relations among them. It is pluralistand non-partisan, bringing economic research to bear on the analysis ofmedium- and long-run policy questions. Institutional (core) finance for theCentre has been provided through major grants from the Economic andSocial Research Council, under which an ESRC Resource Centre operateswithin CEPR; the Esm

é

e Fairbairn Charitable Trust; and the Bank ofEngland. These organizations do not give prior review to the Centre

’

spublications, nor do they necessarily endorse the views expressed therein.These Discussion Papers often represent preliminary or incomplete work,circulated to encourage discussion and comment. Citation and use of such apaper should take account of its provisional character.Copyright: Nicolas Boccard and Patrick Legros

CEPR Discussion Paper No. 3478July 2002

ABSTRACT

Audit Competition in Insurance Oligopolies*

We provide a simple framework for analysing how competition affects thechoice of audit structures in an oligopolistic insurance industry. When thedegree of competition increases, fraud increases but the response of theindustry in terms of investment in audit quality follows a U-shaped pattern.Following increases in competition, the investment in audit quality willdecrease if the industry is initially in a low competition regime, while it willincrease when the industry is in a high competition regime. We use theseresults to show that firms will benefit from forming a joint audit agency onlywhen the degree of competition is intermediate and that cooperation mightimprove total welfare; we also analyse the effects of contract innovation on theperformance of the industry.JEL Classification: D43, D82 and L20Keywords: audit, insurance fraud and oligopolyNicolas BoccardDepartment of EconomicsUniversity of GironaMontilivi Campus17071 GironaSPAINTel: (39 653) 22 94 36Fax: (39 653) 41 80 32Email:

nicolas.boccard@udg.es

For further Discussion Papers by this author see:

www.cepr.org/pubs/new-dps/dplist.asp?authorid=149712

Patrick LegrosECARESUniversit

é

Libre de BruxellesCP11450 Avenue Franklin Roosevelt1050 BrusselsBELGIUMTel: (32 2) 650 4219Fax: (32 2) 650 4475Email:

plegros@ulb.ac.be

For further Discussion Papers by this author see:

www.cepr.org/pubs/new-dps/dplist.asp?authorid=137562