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 twoyear 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. * We thank Sanjiv Tyagi, R. G. Shah, and Hardik Shah for advice and support over the course of this project. We thank Pankaj Verma, Eric Dodge, Vipin Awatramani, Logan Clark, Yuanjian Li, Sam Norris and Nick Hagerty for excellent research assistance and numerous seminar participants for comments. We thank the Sustainability Science Program (SSP), the Harvard Environmental Economics Program, the Center for Energy and Environmental Policy Research (CEEPR), the International Initiative for Impact Evaluation (3ie), the International Growth Centre (IGC) and the National Science Foundation (NSF Award #1066006) I IntroductionThe use of third-party auditing to monitor the compliance of firms with regulation is ubiquitous. Third-party audits are the norm in financial accounting, and in many countries credit ratings from third-party agencies serve an important regulatory role (White, 2010). Consumer and commodity markets use third-party auditors to monitor standards, including those for food safety, healthcare, flowers, timber and many durable goods (Hatanaka et al., 2005;Raynolds et al., 2007;Dranove and Jin, 2010). With respect to environmental regulation, the focus of this paper, several countries use third-party auditors to verify firm compliance with national laws and regulations (Kunreuther et al., 2002;Paliwal, 2006). This paper reports on a two-year field experiment conducted in collaboration with the environmental regulatory body in Gujarat, India. Since 1996, the state has had a third-1 For overviews of problems in the U.S. corporate audit and credit ratings markets see Ronen (2010) and White (2010), respectively. Biased reporting appears to be a key issue for credit rating agencies: for a single credit agency, Griffin and Tang (2011) show higher accuracy of the internal surveillance team's judgments on CDO ratings than the business-oriented ratings team's, and that the accuracy difference predicts future downgrades. Strobl and Xia (2011) compared ratings for the same companies provided by two credit rating agencies, where one agency uses a issuer-p...

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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.

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This paper seeks to explain why billions of people in developing countries either have no access to electricity or lack a reliable supply. We present evidence that these shortfalls are a consequence of electricity being treated as a right and that this sets off a vicious four-step circle. In step 1, because a social norm has developed that all deserve power independent of payment, subsidies, theft, and nonpayment are widely tolerated. In step 2, electricity distribution companies lose money with each unit of electricity sold and in total lose large sums of money. In step 3, government-owned distribution companies ration supply to limit losses by restricting access and hours of supply. In step 4, power supply is no longer governed by market forces and the link between payment and supply is severed, thus reducing customers’ incentives to pay. The equilibrium outcome is uneven and sporadic access that undermines growth.