Next week, Michael Greenstone will be visiting on Tuesday (December 4). We will be having a noon time seminar, as is the norm for Tuesdays, even though the term is over. He will be presenting a new paper titled “Truth-telling by Third-party Auditors and the Response of

Polluting Firms: Experimental Evidence from India,” which is co-authored with Esther Duflo, Rohini Pande, and Nicholas Ryan. The abstract is below. Two requests:

 

 

 

 

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 reforming the system of environmental audits for industrial plants. In the control group, plants remained in the status quo system, wherein they directly chose and paid their third-party auditors. In the treatment group, auditors were randomly assigned to plants, paid a fixed fee from a central pool and had their reports subjected to random backchecks by independent agencies. In the second year, auditors working in the treatment were additionally paid a bonus for 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 reduced 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 the quality of their reports and make regulation more effective.