When tax incentives drive illicit behavior: The manipulation of fuel economy in the automobile industry

This study examines and identifies the underlying incentives for falsifying fuel economy on the part of the automobile industry. Using novel microdata on on-road fuel consumption in Japan, we find a discontinuous increase in the fuel economy gap—the disparity between official test results and real-world fuel economy—of 6 percent at the tax-incentive eligibility thresholds. Further evidence suggests that much of the observed gap remains unexplained by driver or vehicle characteristics, and that no gap is observed at similar levels of fuel economy when they are not tied to the large tax-incentive eligibility. Our findings suggest that feebates, large incentive schemes based on fuel economy levels, may in turn incentivize automakers to “cook the books” on fuel economy figures.