Malfeasance and the Market

Revision with unchanged content. The corporate world has been rocked of late by scandals involving boards cheating shareholders, managers cheating boards and shareholders and auditors colluding with firms they are supposed to monitor. This book explores the microeconomics of this phenomenon. It uses the tools of the theory of games and of asymmetric information to establish the conditions under which boards, managers and auditors will be constrained to honesty. A recommendation: mandatory disclosure of audit fees. We also examine the costs and consequences of ensuring credibility - a limit on firm size, which, together with a minimum size requirement on firms, sets a floor to the personal wealth needed by an entrepreneur for entry. This has implications for the income distribution needed for industrialization and the nature of development policy. A final problem is that of cheating between a final producer and his supplier: we discuss the form of the optimal contract that could avert this. People with some background in economics or those with an interest in corporate governance or economic development will enjoy this book.