When China surprise-audited companies for pollution, the firms just spent more money on political bribes instead of actually cleaning up.
March 20, 2026
Original Paper
Evade or Abate? Corporate Environmental Compliance under Randomized Enforcement
SSRN · 6441735
The Takeaway
We usually assume that making audits random and public prevents firms from gaming the system. However, this study found that while private firms cleaned up, state-owned companies responded to the threat of randomized inspections by spending more on government networking to secure contracts and political cover.
From the abstract
This paper investigates how China's "Dual Random, One Public"(DROP) environmental inspection regime shapes corporate behavior. The DROP regime adopts random selection of inspection targets and law enforcement inspectors, and mandates public disclosure of inspection details. We theoretically model firms' abatement and strategic non-compliance decisions to characterize how the DROP regime changes non-compliance costs conditional on firm ownership and productivity. Using a manually collec