Encouraging Firms to Police Themselves

Strategic Prescriptions to Promote Corporate Self-Auditing

Companies often face a difficult choice in determining the best way to maintain compliance with environmental regulations. Al-though internal environmental compliance audits can be an effective preemptive measure to prevent violations, disincentives such as crimi-nal or civil liability may prevent many firms from implementing compliance audits for fear that their own documents may be used against them in court.One proposed solution to this problem is an environmental self-evaluative privilege, which would prevent audit materials from being used against the firm implementing the audit, thus removing the disin-centive. In the following article, however, Professor Kesan presents a formal game theory model to argue that, although the self-evaluative privilege removes the disincentives, it does not create any positive in-centives for companies to police themselves. Professor Kesan employs an equilibrium analysis to demonstrate that a multipronged approach, which permits regulatory access to audit materials, provides mitigated penalties for self-policing firms, and limits third-party use of audit materials, is the most effective legal regime to encourage firms to po-lice themselves. Such a regime minimizes the fear of self-incrimination but maintains the positive incentives to self-police that regulatory access provides.* Assistant Professor of Law, University of Illinois College of Law. This article has benefited from the helpful comments provided by the participants in this sympo-sium and faculty seminar participants at the Duke University School of Law, the University of Illinois College of Law, and the Program in Environmental and Resource Economics at the University of Illi-nois. I am also grateful to Carlos Ball, Dan Farber, Russell Korobkin, Andy Leipold, Richard McAd-ams, Alan Meese, Barry Mishra, Richard Painter, Jim Pfander, Bill Rodgers, Steve Ross, and Tom Ulen for their helpful comments and suggestions on an earlier draft of this paper. Finally, I would like to thank Andi Frieden for her excellent research assistance, Amy Radosevich at the University of Illinois Law Review for her careful editorial work, and Peggy Olsen for her thorough drafting assistance.

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