Many environmental tax systems rely on self-reported emissions by firms. These emission reports are verified through costly auditing efforts by regulatory agencies that are constrained in their auditing budgets. A typical assumption in the literature is that the agencies allocate audit efforts randomly among otherwise identical firms (random audit mechanism). This paper compares the incentives on firms’ emissions and self-reporting behavior under the random audit mechanism to the incentives under competitive audit mechanisms (CAMs). Under CAMs, higher reported emissions by a firm relative to other firms result in a lower audit intensity. This creates a reporting contest between the firms. The two CAMs under investigation apply different degrees of competitiveness in the reporting contest. I find that both CAMs lead to more truthful reporting, which is in line with the previous literature. Interestingly and novel to the literature, I find that some competition in reporting may induce fewer emissions compared with random auditing, while too much competition in reporting may induce comparatively higher emissions caused by firms.
Environmental regulation Information disclosure Regulatory compliance Tournament theory
D62 H83 L51 Q58
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I am indebted to René Kirkegaard, John Livernois, and Asha Sadanand for their academic supervision, encouragement and valuable research advice. I am also grateful for comments and suggestions from three anonymous Referees as well as from J. Atsu Amegashie, Jeremy Clark, Ida Ferrara, Jean G. Forand, Johanna Goertz, Patrick González, Anthony Heyes, Mike Hoy, Emma Hutchinson, Lester Kwong, Bernard Lebrun, Charles Mason, Ross McKitrick, Dana McLean, Ray Rees and Steven Renzetti as well as from audiences at the 2014 Workshop on Game Theory and the Environment in Montreal, the 2012 ALEA Conference in Stanford, the 2012 EAERE Conference in Prague, the 2012 CREE Conference in Vancouver, the 2012 CEA Conference in Calgary, the 2011 ACEA Conference in Charlottetown, the 2012 UOttawa Ph.D. Workshop on Environmental Economics and Policy and the seminar of CES/Ifo Institute in Munich. I acknowledge the financial support from the Ontario Graduate Scholarship program as well as from the Sustainable Prosperity Network at the University of Ottawa.
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