Corporate Fraud, Governance and Auditing

We analyze corporate fraud in a model where managers have superior information but, due to private benefits from empire building, are biased against liquidation. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To restrain fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking into account external corporate governance and auditing regulation. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and managerial incentive pay are used, worse external governance must be balanced by heavier reliance on both of these incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while options worsen them.accounting fraud, auditing, managerial compensation, corporate governance, regulation

Optimal Regulation of Auditing

We study regulation of the auditing profession in a model where audit quality is unobservable and enforcing regulation is costly. The optimal audit standard falls short of the first-best audit quality, and is increasing in the riskiness of firms and in the amount of funding they seek. The model can encompass collusion between clients and auditors, arising from the joint provision of auditing and consulting services: deflecting collusion requires less ambitious standards. Finally, banning the provision of consulting services by auditors eliminates collusion but may not be optimal in the presence of economies of scope.auditing, regulation, enforcement, collusion.

Legal Standards, Enforcement and Corruption

Stricter laws require more incisive and costlier enforcement. Since enforcement activity depends both on available tax revenue and the honesty of officials, the optimal legal standard of a benevolent government is increasing in per-capita income and decreasing in officials’ corruption. In contrast to the “tollbooth view” of regulation, the standard chosen by a self-interested government is a non-monotonic function of officials’ corruption, and can be either lower or higher than that chosen by a benevolent regulator. International evidence on environmental regulation show that standards correlate positively with percapita income, and negatively with corruption, consistently with the model’s predictions for benevolent governments.legal standards, enforcement, corruption

Optimal Regulation of Auditing

We study regulation of the auditing profession in a model where audit quality is unobservable and enforcing regulation is costly. The optimal audit standard falls short of the first-best audit quality, and is increasing in the riskiness of firms and in the amount of funding they seek. The model can encompass collusion between clients and auditors, arising from the joint provision of auditing and consulting services: deflecting collusion requires less ambitious standards. Finally, banning the provision of consulting services by auditors eliminates collusion but may not be optimal in the presence of economies of scope.auditing, regulation, enforcement, collusion

Noise-induced dephasing of an ac-driven Josephson junction

We consider phase-locked dynamics of a Josephson junction driven by finite-spectral-linewidth ac current. By means of a transformation, the effect of frequency fluctuations is reduced to an effective additive noise, the corresponding (large) dephasing time being determined, in the logarithmic approximation, by the Kramers' expression for the lifetime. For sufficiently small values of the drive's amplitude, direct numerical simulations show agreement of the dependence of the dephasing activation energy on the ac-drive's spectral linewidth and amplitude with analytical predictions. Solving the corresponding Fokker-Planck equation analytically, we find a universal dependence of a critical value of the effective phase-diffusion parameter on the drive's amplitude at a point of a sharp transition from the phase-locked state to an unlocked one. For large values of the drive amplitude, saturation and subsequent decrease of the activation energy are revealed by simulations, which cannot be accounted for by the perturbative analysis. The same new effect is found for a previously studied case of ac-driven Josephson junctions with intrinsic thermal noise. The work was performed in the framework of a cooperation agreement between Consiglio Nazionale di Ricerca (Italy) and the Israeli Ministry of Science and Technology.Comment: latex text file and six eps figure files. Physical Review E, in pres

Norm Flexibility and Private Initiative

We model an enforcement problem where firms can take a known and lawful action or seek a profitable innovation that may enhance or reduce welfare. The legislator sets fines calibrated to the harmfulness of unlawful actions. The range of fines defines norm flexibility. Expected sanctions guide firms’ choices among unlawful actions (marginal deterrence) and/or stunt their initiative altogether (average deterrence). With loyal enforcers, maximum norm flexibility is optimal, so as to exploit both marginal and average deterrence. With corrupt enforcers, instead, the legislator should prefer more rigid norms that prevent bribery and misreporting, at the cost of reducing marginal deterrence and stunting private initiative. The greater is potential corruption, the more rigid the optimal norms.norm design, initiative, enforcement, corruption

Incentives to Innovate and Social Harm: Laissez-Faire, Authorization or Penalties?

We analyze optimal policy design when firms' research activity may lead to socially harmful innovations. Public intervention, affecting the expected profitability of innovation, may both thwart the incentives to undertake research (average deterrence) and guide the use to which innovation is put (marginal deterrence). We show that public intervention should become increasingly stringent as the probability of social harm increases, switching first from laissez-faire to a penalty regime, then to a lenient authorization regime, and finally to a strict one. In contrast, absent innovative activity, regulation should rely only on authorizations, and laissez-faire is never optimal. Therefore, in innovative industries regulation should be softer.innovation, liability for harm, safety regulation, authorization

Constraints on the early and late integrated Sachs-Wolfe effects from the Planck 2015 cosmic microwave background anisotropies in the angular power spectra

The Integrated Sachs-Wolfe (ISW) effect predicts additional anisotropies in the Cosmic MicrowaveBackground due to time variation of the gravitational potential when the expansion of the universeis not matter dominated. The ISW effect is therefore expected in the early universe, due to thepresence of relativistic particles at recombination, and in the late universe, when dark energy startsto dominate the expansion. Deviations from the standard picture can be parameterized byAeISWandAlISW, which rescale the overall amplitude of the early and late ISW effects. Analyzing themost recent CMB temperature spectra from the Planck 2015 release, we detect the presence of theearly ISW at high significance withAeISW= 1.06±0.04 at 68% CL and an upper limit for thelate ISW ofAlISW<1.1 at 95% CL. The inclusion of the recent polarization data from the Planckexperiment erases such 1.5σhint forAeISW6= 1. When considering the recent detections of the lateISW coming from correlations between CMB temperature anisotropies and weak lensing, a value ofAlISW= 0.85±0.21 is predicted at 68% CL, showing a 4σevidence. We discuss the stability of ourresult in the case of an extra relativistic energy component parametrized by the effective neutrinonumberNeffand of a CMB lensing amplitudeA

Two classes of linearly implicit numerical methods for stiff problems: analysis and MATLAB software

The purpose of this work lies in the writing of efficient and optimized Matlab codes to implement two classes of promising linearly implicit numerical schemes that can be used to accurately and stably solve stiff Ordinary Differential Equations (ODEs), and also Partial Differential Equations (PDEs) through the Method Of Lines (MOL). Such classes of methods are the Runge-Kutta (RK) [28] and the Peer [17], and have been constructed using a variant of the Exponential-Fitting (EF) technique [27]. We carry out numerical tests to compare the two methods with each other, and also with the well known and very used Gaussian RK method, by the point of view of stability, accuracy and computational cost, in order to show their convenience