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

49 Pages Posted: 17 Jul 2013 Last revised: 3 Sep 2013

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; 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

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Date Written: July 17, 2013

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.

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

JEL Classification: O13, Q56, L51, M42

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

Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
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Michael Greenstone (Contact Author)

University of Chicago - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Rohini Pande

Harvard University - Harvard Kennedy School (HKS) ( email )

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Nicholas Ryan

Harvard University

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Abdul Latif Jameel Poverty Action Lab Global ( email )

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