The Role of Bargaining Initiative Under no Commitment to Audit

This paper addresses the issue of the optimal contract design under costly state verification and no commitment to auditing when the contract offer comes from the uninformed party. Contrary to similar frameworks and to cases where the informed party retains the bargaining power, we find that the optimal contract is characterised neither by truth telling nor by mixed strategy equilibria. Depending on endogenous revenues and observation cost, a pooling equilibrium with either deterministic or random auditing occurs.