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Environmental Self-Auditing: Setting the Proper Incentives for Discovery and Correction of Environmental Harm

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Author Info

  • Pfaff, Alexander S P
  • Sanchirico, Chris William

Abstract

Many firms conduct "environmental audits" to test compliance with a complex array of environmental regulations. Commentators suggest. however, that self-auditing is not as common as it should be, because firms fear that what they find will be used against them. This article analyzes self-auditing as a two-tiered incentive problem involving incentives both to test for and to effect compliance. After demonstrating the inadequacy of conventional remedies, we show that incentives can be properly aligned by conditioning fines on firms' investigative effort. In practice, however, the regulator may not be able to observe such effort. Accordingly, we propose and evaluate the use of three observable proxies for self-investigation: the manner in which the regulator detected the violation: the firm's own disclosure of violations; and the firm's observed corrective actions. Each method has its own efficiency benefits and informational requirements, and each is distinct from EPA's current audit policy. Copyright 2000 by Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Journal of Law, Economics and Organization.

Volume (Year): 16 (2000)
Issue (Month): 1 (April)
Pages: 189-208

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Handle: RePEc:oup:jleorg:v:16:y:2000:i:1:p:189-208

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Cited by:
  1. Alexander & Chris William Sanchirico & John Lee & Daniel Prager, 2002. "Big field, small potatoes: An empirical assessment of EPA's self-audit policy," Discussion Papers 0102-55, Columbia University, Department of Economics.
  2. Marcel Boyer & Donatella Porrini, 2002. "Modeling the Choice Between Regulation and Liability in Terms of Social Welfare," CIRANO Working Papers 2002s-13, CIRANO.
  3. James J. Murphy & John K. Stranlund, 2005. "An Investigation of Voluntary Discovery and Disclosure of Environmental Violations Using Laboratory Experiments," Working Papers 2005-7, University of Massachusetts Amherst, Department of Resource Economics.
  4. Mary F. Evans & Lirong Liu & Sarah L. Stafford, 2008. "Do Environmental Audits Improve Long-term Compliance? Evidence from Manufacturing Facilities in Michigan," Working Papers 78, Department of Economics, College of William and Mary, revised 25 Sep 2011.
  5. Julien Etienne, 2010. "Self-reporting untoward events to external controllers: accounting for reporting failure by a top tier chemical plant," LSE Research Online Documents on Economics 36546, London School of Economics and Political Science, LSE Library.
  6. Mary Evans & Lirong Liu & Sarah Stafford, 2011. "Do environmental audits improve long-term compliance? Evidence from manufacturing facilities in Michigan," Journal of Regulatory Economics, Springer, vol. 40(3), pages 279-302, December.
  7. Michael W. Toffel, 2008. "Coerced Confessions: Self-Policing in the Shadow of the Regulator," Journal of Law, Economics and Organization, Oxford University Press, vol. 24(1), pages 45-71, May.
  8. Paul Calcott, 2010. "Mandated self-regulation: the danger of cosmetic compliance," Journal of Regulatory Economics, Springer, vol. 38(2), pages 167-179, October.
  9. Motta, Alberto & Burlando, Alfredo, 2007. "Self reporting reduces corruption in law enforcement," MPRA Paper 5332, University Library of Munich, Germany, revised 23 Jun 2007.
  10. Bhole, Bharat & Wagner, Jeffrey, 2008. "The joint use of regulation and strict liability with multidimensional care and uncertain conviction," International Review of Law and Economics, Elsevier, vol. 28(2), pages 123-132, June.
  11. Guerrero, Santiago & Innes, Robert, 2008. "Statutory Rewards to Environmental Self-Auditing: Do They Reduce Pollution and Save Regulatory Costs? Evidence from a Cross-State Panel," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6204, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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