Improving Truthful Reporting of Polluting Firms by Rotating Inspectors: Experimental Evidence from a Bribery Game

49 Pages Posted: 26 Nov 2019

See all articles by Peiyao Shen

Peiyao Shen

ShanghaiTech University - School of Entrepreneurship and Management

Regina Betz

Zurich University of Applied Sciences

Andreas Ortmann

UNSW Australia Business School, School of Economics

Rukai Gong

Donghua University - Glorious Sun School of Business and Management

Date Written: November 25, 2019

Abstract

We consider a two-layered review system of environmental regulation where a polluting firm periodically self-reports its emissions to a regulatory authority. The system typically requires a third party to verify the firm’s report and, in addition, an official of the regulatory authority to spot-check. If there are potential gains from corruption, both the verifier and the official might be corruptible. Corruption is more likely in repeated-game situations, as suggested by the literature on corruption experiments. Our experimental design is motivated by the risk of under-reporting in emissions trading schemes where both the verifier and the official are corruptible and focuses on a situation with untruthful reporting and lax enforcement. Our test-bed is a three-player bribery game. We study how different types of rotation — a baseline of fixed matching, a complete rotation treatment, and two incomplete rotation treatments — affect untruthful reporting that requires collusion between three participants in a hierarchical structure. Our findings suggest that complete rotation improves significantly firms’ truthful reporting and verifiers’ truthful verification compared to situations where none is rotated, while incomplete rotation does not have such impact. In our experiment, none of the rotation treatments had a significant impact on the behavior of officials.

Keywords: truthful reporting, corruption, rotation, environmental regulation, experiment

JEL Classification: C92, D83, K42, Q58

Suggested Citation

Shen, Peiyao and Betz, Regina and Ortmann, Andreas and Gong, Rukai, Improving Truthful Reporting of Polluting Firms by Rotating Inspectors: Experimental Evidence from a Bribery Game (November 25, 2019). ShanghaiTech SEM Working Paper No. 2019-005, Available at SSRN: https://ssrn.com/abstract=3492819 or http://dx.doi.org/10.2139/ssrn.3492819

Peiyao Shen (Contact Author)

ShanghaiTech University - School of Entrepreneurship and Management ( email )

100 Haike Rd
Pudong Xinqu, Shanghai
China

Regina Betz

Zurich University of Applied Sciences ( email )

Centre for Energy and the Environment (CEE)
Bahnhofplatz 12
Winterthur, CH 8401
Switzerland

Andreas Ortmann

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Rukai Gong

Donghua University - Glorious Sun School of Business and Management ( email )

1882 Yan'an Road (West)
Shanghai, 200051
China

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