How Is the Audit Market Affected by Characteristics of the Non-Audit Services Market?

How can features of the markets for audit and non-audit services (NAS) affect an audit firm's incentives to invest in audit quality, the price at which it offers audits, social welfare, and the effects of prohibitions on providing NAS to audit clients and generally? We address this and related questions in a model focusing on an audit firm that can provide both audit and NAS in markets with heterogeneous clients. The audit firm faces competition both in the audit market and in the NAS market. We show that bans on the provision of NAS to audit clients and non-audit clients can increase or decrease audit quality and social welfare, depending on the distributions of client demands and comparative advantage in the audit and NAS markets. These contrasting effects suggest a more nuanced view of how regulating an auditor's provision of NAS might affect audit quality and social welfare, and operate through effects related to competition, pricing, and segmentation on ex ante quality investment incentives and auditor choice rather than previously identified auditor independence or knowledge spillover channels