Monitoring Reports with a Self-Interested Inspector.

If an inspector is work averse and his effort spent on investigating reports is not observable this creates a moral hazard problem whenever there is an imperfect monitoring technology. This problem arises because the organization can not distinguish between an inspection that doesn't find evidence of misrepresented information and an inspection that just hasn't been conducted with due care. We show under what circumstances an organization can overcome this moral hazard problem and when the inspector fulfills his function of deterring falsification of reports.