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Unformatted text preview: to change his or her choice. The expected payoffs to the auditor and to the
manager are 9.75 and 35.78, respectively. Although this Nash equilibrium implies risk
neutrality, the behavioral hypotheses discussed below are not sensitive to this assumption.4
Note that in the trust/cooperate combination, the payoffs to the auditor and manager
are 22.32 and 46.82, respectively. This outcome Pareto dominates the Nash equilibrium,
meaning that both parties are better off under this combination than under the Nash combination. This possibility creates a fertile environment for self-serving bias because auditors
may hold biased perceptions of the manager’s truthfulness, hoping to achieve Pareto superior payoffs. However, under the trust/cooperate combination, the manager has incentives
4 Risk-averse managers would be predicted to decrease fraud levels, and risk-averse auditors would increase the
audit levels, ceteris paribus. See Kachelmeier (1991) for a discussion of risk neutrality; see Bloomﬁeld (1997)
for an example of research that investigates settings that use expected values in the game; see...
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This note was uploaded on 01/27/2014 for the course ACCY 405 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.
- Fall '08