Monitor Reputation and Transparency

Martin Szydlowski Ivan Marinovic - Sep 22, 2020

We study the disclosure policy of a regulator overseeing a monitor with reputation
concerns, such as a bank or an auditor. The monitor oversees a manager, who chooses
how much to manipulate given the monitor's reputation. Reputational incentives are
strongest for intermediate reputations and uncertainty about the monitor is valuable.
Instead of providing transparency, the regulator's disclosure keeps the monitor's reputation
intermediate, even at the cost of diminished incentives. Bene cial schemes
feature random delay. Commonly used ones, which feature immediate disclosure or
xed time delay, destroy reputational incentives. Surprisingly, the regulator discloses
more aggressively when she has better enforcement tools.

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Monitoring regulatory disclosure reputation stress tests bank regulation auditing

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Monitor Reputation and Transparency