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

Esther Duflo, Michael Greenstone, Rohini Pande and Nicholas Ryan

No 19259, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: L51 M42 O13 Q56 (search for similar items in EconPapers)
Date: 2013-07
New Economics Papers: this item is included in nep-ene, nep-env, nep-exp, nep-reg and nep-res
Note: DEV EEE IO LE PE
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Citations: View citations in EconPapers (153)

Published as 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.

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Journal Article: Truth-telling by Third-party Auditors and the Response of Polluting Firms: Experimental Evidence from India (2013)
Working Paper: Truth-telling by Third-party Auditors and the Response of Polluting Firms: Experimental Evidence from India (2013)
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