Game-theoretic analyses of environmental self-reporting systems

Formal game-theoretic models are developed to study systematically the self-monitoring and self-reporting systems that industrial and other enterprises are often required to implement to demonstrate their compliance to environmental regulations. Two specific systems are modeled and analyzed in detail using extensive form games. The first self-reporting system includes strict liability, whereby an operator is liable for injurious discharges, but can use “due diligence” as a defense if it can demonstrate that reasonable care was taken to prevent discharges in violation of environmental standards. The second self-reporting system includes absolute liability, in which the operator is solely responsible for violations, no matter how they were caused. Comparison of Nash equilibria for a range of values of model parameters indicates when self-reporting systems are truly effective, and suggests the circumstances under which a strict liability system, or an absolute liability system, is preferable