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Time to Come Clean? Disclosure and Inspection Policies for Green Production

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  • Sang-Hyun Kim

    (Yale School of Management, Yale University, New Haven, Connecticut 06511)

Abstract

We examine the interplay between two important decisions that impact environmental performance in a production setting: inspections performed by a regulator and noncompliance disclosure by a production firm. To preempt the penalty that will be levied once a compliance violation is discovered in an inspection, the firm dynamically decides whether it should disclose a random occurrence of noncompliance. Anticipating this, the regulator determines inspection frequency and penalty amounts to minimize environmental and social costs, performing either random inspections or periodic inspections. We study this problem by developing a novel analytical framework that combines features from reliability theory and law enforcement economics. We find that, contrary to common belief, surprising the firm with random inspections is not always preferred to inspecting the firm periodically according to a set schedule. We also find that the firm’s opportunistic disclosure timing behavior may lead to a partial disclosure equilibrium in which the substitutable relationship between inspection intensity and penalty is reversed; a threat of increased penalty is accompanied by more frequent inspections.

Suggested Citation

  • Sang-Hyun Kim, 2015. "Time to Come Clean? Disclosure and Inspection Policies for Green Production," Operations Research, INFORMS, vol. 63(1), pages 1-20, February.
  • Handle: RePEc:inm:oropre:v:63:y:2015:i:1:p:1-20
    DOI: 10.1287/opre.2015.1345
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    References listed on IDEAS

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    Cited by:

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    2. Shouqiang Wang & Peng Sun & Francis de Véricourt, 2016. "Inducing Environmental Disclosures: A Dynamic Mechanism Design Approach," Operations Research, INFORMS, vol. 64(2), pages 371-389, April.
    3. Lee, Seungrae & Park, Seung Jae, 2020. "Who should lead carbon emissions reductions? Upstream vs. downstream firms," International Journal of Production Economics, Elsevier, vol. 230(C).
    4. A. Gürhan Kök & Kevin Shang & Şafak Yücel, 2018. "Impact of Electricity Pricing Policies on Renewable Energy Investments and Carbon Emissions," Management Science, INFORMS, vol. 64(1), pages 131-148, January.
    5. Felipe Caro & Prashant Chintapalli & Kumar Rajaram & Chris S. Tang, 2018. "Improving Supplier Compliance Through Joint and Shared Audits with Collective Penalty," Manufacturing & Service Operations Management, INFORMS, vol. 20(2), pages 363-380, May.
    6. Maria R. Ibanez & Michael W. Toffel, 2020. "How Scheduling Can Bias Quality Assessment: Evidence from Food-Safety Inspections," Management Science, INFORMS, vol. 66(6), pages 2396-2416, June.
    7. Ma, Xin & Fan, Di & Zhou, Yi & Yang, Cheng-Hu, 2021. "The impact of inspection on the sustainable production strategy: Environmental violation and abatement in emerging markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 150(C).
    8. Vidya Mani & Suresh Muthulingam, 2019. "Does Learning from Inspections Affect Environmental Performance? Evidence from Unconventional Well Development in Pennsylvania," Service Science, INFORMS, vol. 21(1), pages 177-197, January.
    9. Jiayu Chen & Anyan Qi & Milind Dawande, 2020. "Supplier Centrality and Auditing Priority in Socially Responsible Supply Chains," Manufacturing & Service Operations Management, INFORMS, vol. 22(6), pages 1199-1214, November.
    10. Adem Orsdemir & Bin Hu & Vinayak Deshpande, 2019. "Ensuring Corporate Social and Environmental Responsibility Through Vertical Integration and Horizontal Sourcing," Manufacturing & Service Operations Management, INFORMS, vol. 21(2), pages 417-434, April.
    11. Ratul Lahkar & Vinay Ramani, 2021. "An Evolutionary Approach to Pollution Control in Competitive Markets," Working Papers 68, Ashoka University, Department of Economics.
    12. Sung, Hao-Chang & Ho, Shirley J., 2020. "Supply chain finance and impacts of consumers’ sustainability awareness," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    13. Erica L. Plambeck & Terry A. Taylor, 2016. "Supplier Evasion of a Buyer’s Audit: Implications for Motivating Supplier Social and Environmental Responsibility," Manufacturing & Service Operations Management, INFORMS, vol. 18(2), pages 184-197, May.
    14. Ruixue Guo & Hau L. Lee & Robert Swinney, 2016. "Responsible Sourcing in Supply Chains," Management Science, INFORMS, vol. 62(9), pages 2722-2744, September.
    15. Xiaopei Dai & Yen-Ting Lin & Ruixia Shi & Di Xu, 2020. "A manufacturer’s responsible sourcing strategy: going organic or participating in fair trade?," Annals of Operations Research, Springer, vol. 291(1), pages 195-218, August.
    16. Eduard Calvo & Ruomeng Cui & Juan Camilo Serpa, 2019. "Oversight and Efficiency in Public Projects: A Regression Discontinuity Analysis," Management Science, INFORMS, vol. 65(12), pages 5651-5675, December.
    17. Li Chen & Hau L. Lee, 2017. "Sourcing Under Supplier Responsibility Risk: The Effects of Certification, Audit, and Contingency Payment," Management Science, INFORMS, vol. 63(9), pages 2795-2812, September.

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