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

Pande, Rohini; Greenstone, Michael; Duflo, Esther; Ryan, Nicholas (2013)


Pande, Rohini, Michael Greenstone, Esther Duflo, and Nicholas Ryan. 2013. “What Does Reputation Buy? Differentiation In A Market For Third-Party Auditors”. American Economic Review 103 (3): 314-319.
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.