Truth-telling by Third-party Auditors and the Response of Polluting Firms: Experimental Evidence from India
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.
We thank Sanjiv Tyagi, R. G. Shah, and Hardik Shah for advice and support over the course of this project. We thank Pankaj Verma, Eric Dodge, Vipin Awatramani, Logan Clark, Yuanjian Li, Sam Norris and Nick Hagerty for excellent research assistance and numerous seminar participants for comments. We thank the Sustainability Science Program (SSP), the Harvard Environmental Economics Program, the Center for Energy and Environmental Policy Research (CEEPR), the International Initiative for Impact Evaluation (3ie), the International Growth Centre (IGC) and the National Science Foundation (NSF Award #1066006) for financial support. Ryan thanks an AMID Early Stage Researcher Fellowship for financial support. All views and errors are solely ours. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Greenstone holds more than $10,000 in stock of various public companies that may be subject to air pollution regulations.
Esther Duflo & Michael Greenstone & Nicholas Ryan, 2013. "Truth-telling by Third-party Auditors and the Response of Polluting Firms: Experimental Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 128(4), pages 1499-1545. citation courtesy of