Compliance and Truthfulness : Leveraging Peer Information with Competitive Audit Mechanisms

How to design audit mechanisms that harness the benefits of self-reporting for achieving compliance with regulatory targets while limiting misreporting is a pressing questionin many regulatory contexts, from climate policies to public health. We theoretically and experimentally study the relative performance of a competitive audit mechanism inregulating a socially undesirable activity when peer information about others’ activity levels is present or absent. Using random auditing as a benchmark, the analytical frameworkpredicts always more truthful self-reporting under the competitive mechanism and, in the presence of peer information, fully compliant activity levels. A quasi-laboratoryexperiment confirms the core theoretical findings: Under the competitive audit mechanism, reports are more truthful on average and, in the presence of peer information,participants’ average activity levels, while not reaching full compliance, are closer to the social optimum. The experimental results highlight the considerable potential ofcompetitive audit mechanisms for achieving regulatory targets