The Integrity of Private Third-party Compliance Monitoring

by Michael W. Toffel & Jodi L. Short

Overview — Michael Toffel and Jodi Short examine how conflict of interest and other risks lead to inaccurate monitoring of health, labor, and environmental standards.

Author Abstract

Government agencies are increasingly turning to private, third-party monitors to inspect and assess regulated entities’ compliance with law, just as companies hire auditors to assess their financial accounts, operations, and supply chains. The integrity of these regimes rests on the validity of the information third-party monitors provide. The challenge in designing third-party monitoring regimes is that for-profit private monitors, typically selected and paid by the firms subject to monitoring, have incentives to downplay problems they observe in order to satisfy and retain their clients or to earn income from selling other services. This paper discusses the most important factors that our research and the research of many others has shown can affect the integrity of third-party monitoring and highlights some policy implications for regulators and companies designing third-party monitoring regimes.

Paper Information