Self-Reporting and the Design of Policies for Regulating Stochastic Pollution

Existing environmental regulations frequently require firms to self-report their compliance status to regulatory agencies. Using a principal-agent framework, I derive and compare incentive-compatible regulatory policies with and without self-reporting. I find the firm needs to be audited less often when self-reporting is required, but punished more often. The sign and magnitude of the gains from self-reporting depend on the relative size of audit and sanction costs, the accuracy of the regulator′s monitoring technology, and the desired level of abatement effort.