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Who Benefits When Firms Game Corrective Policies?

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  • Mathias Reynaert
  • James M. Sallee

Abstract

Firms sometimes comply with externality-correcting policies by gaming the measure that determines policy. This harms buyers by eroding information, but it benefits them when cost savings are passed through into prices. We develop a model that highlights this tension and use it to analyze gaming of automobile carbon emission ratings in the EU. We document startling increases in gaming using novel data. We then analyze the effects of gaming in calibrated simulations. Over a wide range of parameters, we find that pass-through substantially outweighs information distortions; on net, buyers benefit from gaming, even when they are fooled by it.

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  • Mathias Reynaert & James M. Sallee, 2021. "Who Benefits When Firms Game Corrective Policies?," American Economic Journal: Economic Policy, American Economic Association, vol. 13(1), pages 372-412, February.
    • Handle: RePEc:aea:aejpol:v:13:y:2021:i:1:p:372-412
    DOI: 10.1257/pol.20190019
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    2. Browne, Oliver R. & Gazze, Ludovica & Greenstone, Michael & Olga Rostapshova, 2022. "Man vs. Machine : Technological Promise and Political Limits of Automated Regulation Enforcement," The Warwick Economics Research Paper Series (TWERPS) 1440, University of Warwick, Department of Economics.
    3. Yingfei Mu & Edward A. Rubin & Eric Zou, 2021. "What’s Missing in Environmental (Self-)Monitoring: Evidence from Strategic Shutdowns of Pollution Monitors," NBER Working Papers 28735, National Bureau of Economic Research, Inc.
    4. Konishi, Yoshifumi & Kuroda, Sho, 2023. "Why is Japan’s carbon emissions from road transportation declining?," Japan and the World Economy, Elsevier, vol. 66(C).
    5. Helm, Ines & Koch, Nicolas & Rohlf, Alexander, 2023. "The effects of cash for clunkers on local air quality," Journal of Urban Economics, Elsevier, vol. 138(C).
    6. Yujie Lin & Joshua Linn, 2023. "Environmental Regulation and Product Attributes: The Case of European Passenger Vehicle Greenhouse Gas Emissions Standards," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 10(1), pages 1-32.
    7. Mathias Reynaert, 2021. "Abatement Strategies and the Cost of Environmental Regulation: Emission Standards on the European Car Market," Review of Economic Studies, Oxford University Press, vol. 88(1), pages 454-488.
    8. Sébastien Houde & Joseph E. Aldy, 2017. "The Efficiency Consequences of Heterogeneous Behavioral Responses to Energy Fiscal Policies," NBER Working Papers 24103, National Bureau of Economic Research, Inc.
    9. Geir H. M. Bjertnæs, 2021. "Taxation of fuel and vehicles when emissions are constrained," Discussion Papers 949, Statistics Norway, Research Department.
    10. Isis Durrmeyer, 2021. "Winners and Losers: The Distributional Effects of the French Feebate on the Automobile Market," Post-Print hal-03514846, HAL.
    11. Tanaka, Shinsuke, 2020. "When tax incentives drive illicit behavior: The manipulation of fuel economy in the automobile industry," Journal of Environmental Economics and Management, Elsevier, vol. 104(C).
    12. Reynaert, Mathias & Ale-Chilet, Jorge & Chen, Cuicui & Li, Jing, 2021. "Colluding Against Environmental Regulation," CEPR Discussion Papers 16038, C.E.P.R. Discussion Papers.
    13. Durrmeyer, Isis & Martinez, Nicolas, 2022. "The Welfare Consequences of Urban Traffic Regulations," TSE Working Papers 22-1378, Toulouse School of Economics (TSE).
    14. Rik L. Rozendaal & Herman R. J. Vollebergh, 2021. "Policy-Induced Innovation in Clean Technologies: Evidence from the Car Market," CESifo Working Paper Series 9422, CESifo.

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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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