Different beta scaling factors also imply different values of optima! i However, unlike the interest rate, the relationship between the beta scaling factor and tbe optimal /„ for our data is nonmonotonic. This is illustrated in Figure 5 for beta scaling factors of 0.001. 0.005, 0.01 (baseline), 0.05, 0.10, and 0.2, given the baseline interest rate of 6 percent. The pattern of values of optimal t^ is U-shaped with the minimum value occurring at the baseline value, 0.01, of the beta scaling factor. This pattern can be explained intuitively as follows (see the Appendix for a mathematical explanation). Higher values of beta imply that losses are accruing faster requiring more frequent audits for a given audit cost. Tbis implies lower values of optimal t^. However, losses rise asymptotically to a maximum level equal to M. If beta reacbes a certain level (represented by a scaling factor of 0.01 in Figure 5) the maximum losses are approached at such a short audit interval that it becomes optimal to extend tbe audit interval to reap the gains from lower audit costs. Beyond this point, higher values of beta imply
longer optimal audit intervals. Hence, there is a nonmonotonic relationship between
beta and optimal /„.
Different beta scaling factors also imply different values of optima! i However, unlike the interest rate, the relationship between the beta scaling factor and tbe optimal /„ for our data is nonmonotonic. This is illustrated in Figure 5 for beta scaling factors of 0.001. 0.005, 0.01 (baseline), 0.05, 0.10, and 0.2, given the baseline interest rate of 6 percent. The pattern of values of optimal t^ is U-shaped with the minimum value occurring at the baseline value, 0.01, of the beta scaling factor. This pattern can be explained intuitively as follows (see the Appendix for a mathematical explanation). Higher values of beta imply that losses are accruing faster requiring more frequent audits for a given audit cost. Tbis implies lower values of optimal t^. However, losses rise asymptotically to a maximum level equal to M. If beta reacbes a certain level (represented by a scaling factor of 0.01 in Figure 5) the maximum losses are approached at such a short audit interval that it becomes optimal to extend tbe audit interval to reap the gains from lower audit costs. Beyond this point, higher values of beta imply
longer optimal audit intervals. Hence, there is a nonmonotonic relationship between
beta and optimal /„.
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