49 Pages Posted: 17 Jul 2013 Last revised: 3 Sep 2013
Date Written: July 17, 2013
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.
Keywords: Third-party auditing, environment and development, environmental regulation, information intermediaries, industrial pollution
JEL Classification: O13, Q56, L51, M42
Suggested Citation: 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: https://ssrn.com/abstract=2294736 or http://dx.doi.org/10.2139/ssrn.2294736