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http://ssrn.com/abstract=2294736
 
 

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Truth-Telling by Third-Party Auditors and the Response of Polluting Firms: Experimental Evidence from India


Esther Duflo


Massachusetts Institute of Technology (MIT) - Department of Economics; Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Bureau for Research and Economic Analysis of Development (BREAD)

Michael Greenstone


University of Chicago - Department of Economics; Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Rohini Pande


Harvard University - Harvard Kennedy School (HKS)

Nicholas Ryan


Harvard University; Abdul Latif Jameel Poverty Action Lab Global

July 17, 2013

MIT Department of Economics Working Paper No. 13-17

Abstract:     
In many regulated markets, private, third-party auditors are chosen and paid by the firms that they audit, potentially creating a conflict of interest. This paper reports on a two-year field experiment in the Indian state of Gujarat that sought to curb such a conflict by altering the market structure for environmental audits of industrial plants to incentivize accurate reporting. There are three main results. First, the status quo system was largely corrupted; with auditors systematically reporting plant emissions just below the standard, although true emissions were typically higher. Second, the treatment caused auditors to report more truthfully and very significantly lowered the fraction of plants that were falsely reported as compliant with pollution standards. Third, treatment plants, in turn, reduced their pollution emissions. The results suggest reformed incentives for third-party auditors can improve their reporting and make regulation more effective.

Number of Pages in PDF File: 49

Keywords: Third-party auditing, environment and development, environmental regulation, information intermediaries, industrial pollution

JEL Classification: O13, Q56, L51, M42

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Date posted: July 17, 2013 ; Last revised: September 3, 2013

Suggested Citation

Duflo, Esther and Greenstone, Michael and Pande, Rohini and Ryan, Nicholas, Truth-Telling by Third-Party Auditors and the Response of Polluting Firms: Experimental Evidence from India (July 17, 2013). MIT Department of Economics Working Paper No. 13-17. Available at SSRN: http://ssrn.com/abstract=2294736 or http://dx.doi.org/10.2139/ssrn.2294736

Contact Information

Esther Duflo
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
Room E52-252G
Cambridge, MA 02142
United States
617-258-7013 (Phone)
617-253-6915 (Fax)
Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )
Cambridge, MA
United States
HOME PAGE: http://www.povertyactionlab.org/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Bureau for Research and Economic Analysis of Development (BREAD) ( email )
Duke University
Durham, NC 90097
United States
Michael Greenstone (Contact Author)
University of Chicago - Department of Economics ( email )
1126 East 59th Street
Chicago, IL 60637
United States
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
E52-391
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Rohini Pande
Harvard University - Harvard Kennedy School (HKS) ( email )
79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-384-5267 (Phone)
617-495-2575 (Fax)
Nicholas Ryan
Harvard University
K239 1737 Cambridge St
Cambridge, MA 02138
United States
Abdul Latif Jameel Poverty Action Lab Global ( email )
79 JFK Street
Cambridge, MA 02138
United States
617-254-1830 (Phone)
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