Creating incentives for industry self-policing: an evaluation of the EPA’s audit policy

To encourage industry self policing, the EPA (Environmental Protection Agency) offers rewards, in the form of reduced penalties, to firms that voluntarily conduct compliance audits and report any discovered violations to the EPA. This paper evaluates the EPA's audit policy by comparing the social costs when self auditing occurs with the alternative of relying on agency inspections to uncover violations. Because of the need to maintain a credible deterrent, self policing reduces, but does not eliminate inspection costs. When inspections or audits are costly compared to the damage caused by violations, self auditing will not be socially beneficial