Mediated Audits

I study the optimal audit mechanism when the principal cannot
commit to an audit strategy. Invoking a relevation principle, the
agent reports her type to a mediator whi assigns contracts and
recommends the principla whether to audit. For each reported type
the mediator randomizes over a base-contract and the audit
contract, accompanied by a recommendation to audit. For large
penalties the optimal mechanism uses strictly more contracts than
types and cannot be implemented via offering a menu of contracts.
The analysis provides a proper benchmark for studying auditing
under limited commitment and sheds new light on the usefulness of
mediation in contracting and on the design of optimal mechanisms.