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American Economic Review: Vol. 103 No. 3 (May 2013)

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What Does Reputation Buy? Differentiation in a Market for Third-Party Auditors

Article Citation

Duflo, Esther, Michael Greenstone, Rohini Pande, and Nicholas Ryan. 2013. "What Does Reputation Buy? Differentiation in a Market for Third-Party Auditors." American Economic Review, 103(3): 314-19.

DOI: 10.1257/aer.103.3.314

Abstract

We study differences in quality in the market for third-party environmental auditors in Gujarat, India. We find that, despite the low overall quality, auditors are heterogeneous and some perform well. We posit that these high-quality auditors survive by using their good name to insulate select client plants from regulatory scrutiny. We find two pieces of evidence broadly consistent with this hypothesis: (i) though estimates are not precise, higher-quality auditors appear to be paid more both in their work as third-party auditors and in their complementary work as consultants; and (ii) plants with high-quality auditors incur fewer costly penalties from the regulator.

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Authors

Duflo, Esther (MIT)
Greenstone, Michael (MIT)
Pande, Rohini (Harvard U)
Ryan, Nicholas (Harvard U)

JEL Classifications

G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
M42: Auditing
O13: Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
O14: Industrialization; Manufacturing and Service Industries; Choice of Technology
Q52: Pollution Control Adoption Costs; Distributional Effects; Employment Effects
Q56: Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth


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