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4 note that in the trustcooperate combination the

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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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