The Role of Inter-Firm Information on the Effectiveness of Competitive Audit Mechanism

The paper presented in this ZEW Research Seminar unifies in a theoretical framework with endogenous emissions and emission reports several recent advances on competitive audit mechanisms for the enforcement of environmental taxes. While random auditing assigns the same audit probability to each regulated firm, competitive audit mechanisms assign a lower audit probability to the firms with higher self-reported emissions relative to others. The resulting strategic interdependences between the firms can yield audit leverage for the environmental protection agency. When firms have no information about each others' emissions, competitive auditing induces higher reported emissions and the same level of actual emissions as compared to random auditing. These two results are isomorph to the main findings by Gilpatric et al. (2011) and Cason et al. (2016) respectively. When firms have perfect information about each others' emissions, competitive auditing induces the socially optimal level of emission, while this is not feasible under the random audit mechanism. This result is isomorph to the main finding by Oestreich (2017). The experimental design in the paper presented in this ZEW Research Seminar also allows the authors to extend the model to the case where firms have limited information about each others' emissions.