We model purchaser–provider contracts when providers can inflate reimbursable activity
through manipulation. Providers are audited and fined upon detected fraud. We characterise
the optimal price and audit policy both in the presence and absence of commitment to an
audit intensity. Under 'non-commitment'the audit intensity increases in reported activity,
allowing the provider to soften it by reducing activity together with the underlying service
quality and manipulation. The purchaser then faces a trade-off between offsetting this …