Rohini Pande, Mohammed Kamal Professor of Public Policy and HEEP Faculty Fellow, Michael Greenstone, 3M Professor of Environmental Economics at MIT and HEEP Associate Scholar, and their colleagues recently published a paper presenting the results of a two-year study, the goal of which was to improve the effectiveness of environmental regulation in India. HEEP provided partial support for the study.
The paper is titled "Truth-telling by third-party auditors and the response of polluting firms: Experimental evidence from India." Readers with access to an online library may read the published paper here. An earlier, open-access version of the paper is available here. Following is the abstract of the paper:
Professor Greenstone published an op-ed in The New York Times on December 6, 2013, summarizing and exploring the broader implications of the study. Earlier articles appeared on Quartz (the business-news aggregator) and in The Wall Street Journal (subscription for the WSJ required)."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 article 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."