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

Posted: 12 Jan 2000

See all articles by Chris William Sanchirico

Chris William Sanchirico

University of Pennsylvania Carey Law School; University of Pennsylvania Wharton School - Business Economics and Public Policy Department

Alexander Pfaff

Duke University - Policy, Economics, Environment

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.

JEL Classification: K00, N5, K4, L5, K32, H2, K23

Suggested Citation

Sanchirico, Chris William and Pfaff, Alexander, Environmental Self-Auditing: Setting the Proper Incentives for Discovery and Correction of Environmental Harm. Available at SSRN: https://ssrn.com/abstract=198827

Chris William Sanchirico (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-4220 (Phone)

HOME PAGE: http://www.law.upenn.edu/faculty/csanchir/

University of Pennsylvania Wharton School - Business Economics and Public Policy Department

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Alexander Pfaff

Duke University - Policy, Economics, Environment ( email )

201 Science Drive
Box 90312
Durham, NC 27708-0239
United States

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