Honesty in Environmental Compliance Games

This note investigates the consequences of honesty in a compliance game involving polluting firms and an environmental agency. Two enforcement schemes with or without self-reporting of behavior are considered. First, we show that non intervention may become optimal when the proportion of honest polluters is large enough but still inferior to one. Secondly, the increase in the number of honest polluters has striking ambiguous effects on pollution and social welfare. Indeed, we give examples in which an increase in the proportion of honest polluters leads to an increase in the number of non compliant polluters or a decrease in social welfare.