Self-Reporting Systems for Environmental Compliance

Abstract

Game-theoretic models are developed to study systematically self-monitoring and self-reporting requirements for industrial and other enterprises to demonstrate compliance with environmental regulations. Two specific systems are modeled and analyzed in detail. The first self-reporting system includes strict liability, whereby an operator is liable for injurious discharges but can use “due diligence” as a defense if it can demonstrate that reasonable care was taken to prevent discharges in violation of environmental standards. The second model represents an absolute liability system, in which the operator is solely responsible for violations, no matter how they were caused. Nash equilibrium analyses of these two models demonstrate that in neither strict nor absolute liability can the agency induce truthful reporting by an operator who does not provide due care. Despite inducing maximum care by the operator, absolute liability discourages that operator from reporting truthfully to the agency. On the other hand, a strict liability system cannot bring about the maximum level of care by the operator. While strict liability can prevent a hard-working operator from being punished due to chance violation, it also creates incentives for the operator to shirk and thus be less than fully diligent.