An Experimental Investigation of Alternative Damage-Sharing Liability Regimes with an Auditing Perspective

Abstract

In this study we use experimental markets to investigate some potential effects of three liability regimes that differ on the issue of damage sharing. In the first, termed an auditor (verifier) negligence regime, the verifier is liable if negligent and only he pays damages. In the second, called the proportionate liability regime, a manager (seller) and a verifier are proportionately liable, given certain actions, and both have sufficient wealth to pay damages. The third regime is also a proportionate liability regime, but only verifiers pay damages because sellers lack the wealth to pay their share. The basic design modifies that used in Dopuch and King [1992] to investigate the effects of negligence and strict liability regimes. Our results complement theirs by providing insights into the effects of various damage-sharing regimes on strategy choices and wealth distribution. One of the ongoing debates of auditors' legal liability is the extent to which auditing firms and their partners should be held jointly and