Managerial incentives for compliance with environmental information disclosure programs

Publicly reported information on the environmental behavior of firms can increase the efficacy of private markets as a mechanism to control environmental malfeasance through liability for harm, consumer demand response, and shareholder reaction. In the case of mandatory information disclosure programs, firms are required to report information that is potentially damaging to them. We argue that a firm’s internal organizational structure alters the incentives faced by decision-makers and therefore has the potential to affect their compliance decisions. We adapt a theoretical model developed by Gilpatric (2005) to examine these incentives and test the resulting hypotheses using experimental data. Experimental results confirm theoretical predictions of increased non-compliance when audit probabilities increase, but in contrast to theory there is no discernable effect of changing penalties for non-compliance.