• (i) In the event that , after that auditor 2 sells auditing features out of high quality so you can website subscribers and in the a charge out of . Auditor 2 also offers NAS so you can buyer and you can charges for NAS. Brand new representative kits and you may sells NAS so you’re able to customers and you can .
• (ii) Otherwise, if the , after that auditor dos deal auditing features of top quality in order to consumer at a fee from . Auditor 2 has the benefit of NAS so you can client companies and you will , and you may charges for Houston dating NAS. The fresh new representative sets and you can sells NAS to visitors .

Targeting audit attributes at just new highest-exposure visitors means taking top quality audits on a top rate

Keep in mind off Proposal step one you to auditor dos faces a tradeoff anywhere between selling auditing services merely to one to client corporation at a high rates, and you may offering auditing attributes to one or two client companies during the a lower rate. Rather than NAS constraints, auditor dos earns no-rent on NAS industry, since the auditor dos partcipates in Bertrand race to your agent. However, that have NAS limitations, the associate is actually good monopolist provider away from contacting characteristics on the visitors firms audited by the auditor 2, and therefore costs an optimistic rate. Inside the equilibrium, auditor 2 will ergo secure NAS rents about subscribers they doesn’t audit. Which have NAS limitations so you’re able to review subscribers, following, auditor 2’s alternatives anywhere between selling audit features only to visitors and you may promoting review services so you’re able to customers and you may depends on auditor 2’s NAS rents.

It’s noteworthy the rise in review high quality is not related to auditor independence or studies spillover points, since these are missing from our design

Incorporating NAS rents in the auditor 2’s mission, regarding ban out of NAS to help you review members, causes brand new endurance on the , portrayed of the , so you can count on the brand new demand covariance, the real difference for the exposure between members and you may , and , hence scales the worth of NAS. These types of enter into auditor 2’s audit top quality means while they grab the relevant tradeoff encountered by auditor dos apart from brand new tradeoffs grabbed for the Offer 1. Which have NAS limits so you’re able to audit members, centering on audits from the visitors , through highest review quality, allows auditor 2 to earn NAS rents off visitors , which were missing whenever NAS supply is actually unrestricted. Additionally, the purchase price you to auditor 2 can charge having NAS, if this audits merely visitors , is dependant on the price tag that representative fees to help you client . Auditing just buyer hence allows auditor 2 so you’re able to fees a high speed on the a couple website subscribers they produces NAS rents out of. The fresh incremental NAS costs is visible because of the evaluating the new left and you can best edges of the inequality into the (15). This type of count on , , and you can , due to the fact really does the latest disagreement to inside Suggestion 2.

Proposition 2 features just how a regulatory prohibit into supply from NAS so you can review clients renders auditor 2 and also the NAS opponent best off. Fundamentally, such limits perform niches where for every provider brings in dominance rents where until the rents had been dissipated of the Bertrand battle. Proposition dos next shows how, which have confident correlation anywhere between NAS and you may audit demand, auditor dos is much more likely to prefer a high review top quality and gives audits to a very minimal segment, due to the fact . New power is the rent the NAS restriction lets auditor dos to make from NAS, that may simply be generated off consumer firms which new auditor doesn’t promote auditing qualities so you’re able to.

• improve auditor 2’s review high quality, , and
• improve mediocre audit high quality when the and simply if the .

Otherwise, when the , auditor 2’s review quality and you will average review quality which have NAS constraints so you can audit clients are the same as missing NAS limitations.

Limiting NAS to help you audit members will bring auditor 2 having an extra advantage of offering audit services merely to customer as opposed to in order to customers and you will , via the NAS rents which are acquired out of client . But not, and also this implies that consumer endogenously switches to help you a lesser top quality audit company. Just like the found in the Corollary dos, there can be a confident relationship between auditor 2’s review top quality and mediocre review high quality if the and just when the auditor 1’s review quality try sufficiently highest, that is, in case your lose for the high quality to possess buyer is not all that big. And this, in the event that auditor 1’s review quality try sufficiently higher, NAS constraints to help you audit clients improve mediocre audit high quality.