extends the agency cost-padding model by Laffont and Tirole (1992) to allow for the principal to be a partially selfish … auditing in order to create an incentive for cost-padding, and engages in corruption with the firm in case of detection. If the … cost of auditing is high enough, even a benevolent politician might prefer to allow cost-padding. …

politician chooses a relatively lax auditing in order to create an incentive for cost-padding, and engages in corruption with the … firm in case of detection. If the cost of auditing is high enough, even a benevolent politician might prefer to allow cost-padding. …

politician chooses a relatively lax auditing in order to create an incentive for cost-padding, and engages in corruption with the … firm in case of detection. If the cost of auditing is high enough, even a benevolent politician might prefer to allow cost-padding. …

choice, an increase in the cost of falsification has two effects. First, there is a direct effect that reduces cost padding … because it becomes more expensive to do so. Second, there is an indirect effect that increases cost padding because the firm … responds by choosing lower investments, and lower investments are associated with more cost padding. It is demonstrated that …

, firms have an incentive to manipulate their costs (cost padding). This causes monopoly regulation aiming at improving … because cost padding is hampered by firms’ non-cooperative behaviour. …

cost types. It is shown that high cost firms pad costs more than low cost ßrms. We also show that cost padding moves … costly, low cost firms face a fixed price contract and engage in no cost padding. High cost ßrms do less well but do engage … in padding to increase the verified cost. If padded costs can be audited at some cost, low cost types engage in cost …