#584 2013 · Gujarat Pollution Control Board (field experiment by Duflo, Greenstone, Pande, Ryan) · Environmental regulation

Gujarat's regulator fixed corrupt pollution audits by changing who pays the auditor, not who audits

the problem

Factories hired and paid their own pollution auditors, who had every reason to report compliance whether or not it was true

background

Gujarat, like most of India and much of the world, required polluting industrial plants to hire an accredited third-party auditor to measure and report their own emissions to the regulator. The plant chose which auditor to hire and paid that auditor directly -- a business relationship in which an auditor who reported a plant's true, often illegal, emissions risked never being hired by that plant, or any other plant, again. Researchers later found the result was close to universal: across pollutant types, roughly 29 percent of audits under this system wrongly reported emissions as compliant when they weren't, and for particulate matter specifically only about 7 percent of plants were ever cited for violations despite an estimated 59 percent actually violating the standard.

The standard regulatory response to weak inspection is to hire more government inspectors and audit more plants directly -- expensive, slow to scale, and it does nothing about the underlying incentive problem if private auditors keep doing the actual measuring. Gujarat's Pollution Control Board could not realistically replace the entire third-party audit industry with its own staff.

what everyone would do

Hire more government inspectors and audit plants directly, bypassing the compromised private auditors entirely -- the standard fix for weak enforcement, and one Gujarat's regulator couldn't realistically afford at the scale of its entire industrial base.

what they saw

The auditors weren't incompetent, they were correctly responding to who was paying them. The corruption wasn't a flaw in the audit process itself, it was a structural fact about who chose the auditor and who signed their check -- and that relationship could be redesigned without touching who actually walked the factory floor and took the measurements.

the move

Researchers working with the Gujarat Pollution Control Board (GPCB) randomly assigned about half of roughly 473 studied industrial plants to a reformed audit system: instead of choosing and paying their own auditor, treatment-group plants were assigned an auditor at random by the GPCB, that auditor was paid a fixed fee from a central pool rather than by the plant, 20 percent of audits were randomly selected for an independent back-check, and auditors received a bonus tied to how closely their reported reading matched that back-check.

why it works

Random assignment removes a plant's ability to reward an accommodating auditor with repeat business or punish an honest one by never hiring them again, since the plant no longer chooses who audits it. Paying from a central pool instead of the plant severs the direct financial dependence that made an auditor's livelihood contingent on that specific plant's approval. And tying a bonus to an independent back-check gives the auditor a new incentive that runs the opposite direction from the old one -- accuracy now pays, inaccuracy now costs -- so the same auditors, doing the same physical measurements, report differently because the only thing that changed is what behavior gets rewarded.

the payoff

Auditors in the reformed system were roughly 80 percent less likely to submit a false pollution reading than under the status quo, and plants audited under the new system measurably reduced their actual air and water pollutant emissions -- by about 28 percent overall, driven mostly by the most heavily polluting plants -- within the study period, because for the first time the auditor's report and the plant's true emissions had to agree.

where it breaks

It requires a credible, well-resourced third party able to run the random assignment, hold the payment pool, and actually conduct the back-checks -- a regulator too weak or too captured to run its own re-examination process can't make the bonus credible, and the whole mechanism collapses back into the old incentive. It also depends on the reviewed party not being able to route around the random assignment through side payments or informal pressure on whichever auditor they're assigned; the fix protects against auditor selection bias, not against a determined plant bribing whoever shows up.

what came after

The Gujarat Pollution Control Board formally adopted the reformed audit-market structure statewide, issuing new guidelines on January 29, 2015 that require random auditor assignment and independent verification, and rolling out software (Extended Green Node) in March 2015 to automate the random matching and remove auditor-firm discretion entirely -- a rare case of a randomized field experiment being converted directly into standing government policy rather than staying an academic result.

references

[1]Strengthening Third-Party Audits to Reduce PollutionAbdul Latif Jameel Poverty Action Lab (J-PAL), MIT, 2013povertyactionlab.org
[2]An experiment puts auditing under scrutinyScienceDaily (MIT News release), 2013sciencedaily.com
[3]Truth-telling by Third-party Auditors and the Response of Polluting Firms: Experimental Evidence from India (NBER Working Paper 19259)National Bureau of Economic Research, 2013nber.org