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

Abstract

Experimental economics affords the ability to examine market reactions to varying economic institutions under true ceteris paribus conditions. Dopuch, King, and Schatzberg (henceforth DKS) took advantage of this ability in their design to investigate the impact of switching from a joint and several liability structure to a proportionate liability structure in the market for audit services. DKS examined a broad set of strategic responses to alternative liability rules, including pricing strategies in markets for both managerial and audit services, managerial effort (investment) strategies, managerial reporting strategies, auditor investigation strategies, and investors' propensities to bring suit. Conference participants raised questions regarding whether the critical features surrounding the audit liability controversy were fully captured in the DKS design. At a more fundamental level, a second theme raised at the conference focused on what is gained by carrying out the administration of laboratory markets once the analytic model underlying those markets has been formulated. The remainder of this discussion addresses both themes.