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Ackerlof (1970) introduces a setting in which an entrepreneur wishes to sell his or her firm. In contrast with potential investors, the entrepreneur knows the intrinsic value (quality) of his or her firm. The entrepreneur is furthermore unable to communicate credibly his or her private information to the set of potential investors. Given any market price for the firm, the entrepreneur hence only sells his or her firm if the intrinsic value of it is lower than or equal to the market price. Unobservability of the quality of the firm is then shown to lead to the collapse of the market, with the entrepreneur only selling the firm if it is of the lowest quality (adverse selection). Furthermore, the entrepreneur, when endowed with favourable information, is penalized if forced to sell the firm. In the Ackerlof setting, entrepreneurs would thus like to communicate their private information to the capital market. Crawford and Sobel (1982) show that disclosures can have an effect on the adverse selection problem only if they are credible. Milgrom (1981) establishes demand for third‐party certification by showing that credible disclosures can solve the adverse selection problem. While demand for audit services can also be derived in agency settings ( Jensen and Meckling, 1976 ), this entry focuses on market settings. Auditors own a technology that aids in distinguishing between different ... log in or subscribe to read full text