13 Oct 2006Working Paper Summaries

Coerced Confessions: Self-Policing in the Shadow of the Regulator

by Jodi L. Short and Michael W. Toffel

Are regulators necessary? In industry, self-regulation and self-policing have been touted as a new paradigm of regulation that trades outmoded "command-and-control" strategies for industry-directed, market-based solutions. Short and Toffel's work, one of the first empirical studies to address self-policing behavior, examined a rich data set of companies' voluntary disclosures of regulatory violations under the U.S. Environmental Protection Agency's Audit Policy. The goal: to learn how violators behave when offered the option of voluntarily self-disclosing. The results show that even as corporations are given an expanding role in their own governance, the success of "voluntary" self-policing depends on the continued involvement of regulators with coercive powers. Key concepts include:

Despite the rhetoric of cooperation surrounding self-policing programs, self-disclosures of violations are motivated by coercive regulatory enforcement activities.
Facilities in the study were more likely to self-disclose violations if they were recently inspected, subjected to an enforcement action, or narrowly targeted for heightened scrutiny by a compliance incentive program.
There was some evidence that facilities were more likely to "turn themselves in" in states where statutory immunity shielded their self-disclosed violations from prosecution.
There was no evidence that facilities protected by state-level audit privilege were more likely to self-disclose.
This research counsels caution regarding the extent to which government should cede regulatory monitoring to companies themselves, and suggests that self-policing can complement, but not substitute for, government regulatory inspections.

Author Abstract

As part of a recent trend toward more cooperative relations between regulators and industry, novel government programs are encouraging firms to monitor their own regulatory compliance and voluntarily report their own violations. In this study, we examine how regulatory enforcement activities influence organizations' decisions to self-police. We created a comprehensive dataset for the "Audit Policy," a United States Environmental Protection Agency (US EPA) program that encourages companies to self-disclose violations of environmental laws and regulations in exchange for reduced sanctions. We find that facilities are more likely to self-disclose if they were recently subjected to one of several different enforcement measures and if they were provided with immunity from prosecution for self-disclosed violations.