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Improving Third-Party Audits and Regulatory Compliance in India
Last registered on August 19, 2016

Pre-Trial

Trial Information
General Information
Title
Improving Third-Party Audits and Regulatory Compliance in India
RCT ID
AEARCTR-0001355
Initial registration date
August 19, 2016
Last updated
August 19, 2016 10:42 AM EDT
Location(s)
Region
Primary Investigator
Affiliation
University of Chicago
Other Primary Investigator(s)
PI Affiliation
Yale University
PI Affiliation
Harvard University
PI Affiliation
Massachusetts Institute of Technology (MIT)
Additional Trial Information
Status
Completed
Start date
2008-01-01
End date
2011-12-31
Secondary IDs
Abstract
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.
External Link(s)
Registration Citation
Citation
Duflo, Esther et al. 2016. "Improving Third-Party Audits and Regulatory Compliance in India." AEA RCT Registry. August 19. https://doi.org/10.1257/rct.1355-1.0
Former Citation
Duflo, Esther et al. 2016. "Improving Third-Party Audits and Regulatory Compliance in India." AEA RCT Registry. August 19. https://www.socialscienceregistry.org/trials/1355/history/10253
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Experimental Details
Interventions
Intervention(s)
Intervention Start Date
2008-01-01
Intervention End Date
2011-12-31
Primary Outcomes
Primary Outcomes (end points)
Audits Submitted

Narrow Compliance in Audits Relative to Backchecks (dummy for pollutant between 75% and 100% of regulatory standard): (All Pollutants/Water Pollutants/Air Pollutants) (Control Group)

Compliance in Audits Relative to Backchecks (dummy for pollutant at or below regulatory standard): (All Pollutants/Water Pollutants/Air Pollutants) (Control Group)

Narrow Compliance in Audits Relative to Backchecks (dummy for pollutant between 75% and 100% of regulatory standard): (All Pollutants/Water Pollutants/Air Pollutants) (Treatment Group)

Compliance in Audits Relative to Backchecks (dummy for pollutant at or below regulatory standard): (All Pollutants/Water Pollutants/Air Pollutants) (Control Group) (Treatment Group)

Audit Treatment Effects on Auditor Reporting: Compliance (dummy for pollutant in audit report at or below regulatory standard)

Audit Treatment Effects on Auditor Reporting: Level of pollutant in audit report (standard deviations relative to backcheck mean)

Audit Treatment Effects on Auditor Reporting: Level of pollutant in audit report minus level of pollution in backcheck (standard deviations)

Endline Pollution Concentrations on Treatment Status: Level of pollutant in endline survey, all pollutants (standard deviations relative to backcheck mean)

Endline Pollution Concentrations on Treatment Status: Dependent variable: Compliance (dummy for pollutant in endline
survey at or below regulatory standard)










Primary Outcomes (explanation)
Secondary Outcomes
Secondary Outcomes (end points)
Secondary Outcomes (explanation)
Experimental Design
Experimental Design
This experiment sought to curb a conflict of interest in the enforcement of industrial emissions standards by altering the market structure for environmental audits of industrial plants to incentivize accurate reporting. It was conducted in collaboration with the environmental regulatory body in Gujarat, India. Ordinarily, auditors are chosen by, paid by, and report to the audited firm. Beginning with two populations of industrial plants from two regions of Gujarat, half of the industrial plants in each region were randomized into a treatment with four parts. First, treatment plants were randomly assigned an auditor they were required to use. Second, auditors were paid from a central pool, rather than by the plant. Third, a random sample of each auditor's pollution readings were verified with follow-up visits (backchecks) to the audited plants by an independent technical agency. Fourth, at the start of the second year, treatment auditors were informed that their pay would be linked to their reporting accuracy, as measured by these backchecks. Data were collected from audit reports filed with the regulator, and from the agencies conducting backcheck readings.

Experimental Design Details
Randomization Method
In each of the two regions, half the plants were randomized into the treatment
Randomization Unit
industrial plants
Was the treatment clustered?
No
Experiment Characteristics
Sample size: planned number of clusters
no clusters
Sample size: planned number of observations
633 industrial plants in provisional sample
Sample size (or number of clusters) by treatment arms
233 industrial plants treatment

240 industrial plants control
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
IRB
INSTITUTIONAL REVIEW BOARDS (IRBs)
IRB Name
IRB Approval Date
IRB Approval Number
Post-Trial
Post Trial Information
Study Withdrawal
Intervention
Is the intervention completed?
Yes
Intervention Completion Date
December 31, 2011, 12:00 AM +00:00
Is data collection complete?
Yes
Data Collection Completion Date
December 31, 2011, 12:00 AM +00:00
Final Sample Size: Number of Clusters (Unit of Randomization)
no clusters
Was attrition correlated with treatment status?
No
Final Sample Size: Total Number of Observations
473 industrial plants
Final Sample Size (or Number of Clusters) by Treatment Arms
233 industrial plants treatment 240 industrial plants control
Data Publication
Data Publication
Is public data available?
No
Program Files
Program Files
No
Reports and Papers
Preliminary Reports
Relevant Papers
Abstract
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.
Citation
Duflo, Esther, Michael Greenstone, Rohini Pande, and Nicholas Ryan. 2013. "Truth-Telling by Third-Party Auditors and the Response of Polluting Firms: Experimental Evidence from India." The Quarterly Journal of Economics 128(4): 1499-1545.