IDEAS home Printed from https://ideas.repec.org/a/aea/aejpol/v13y2021i1p372-412.html

Who Benefits When Firms Game Corrective Policies?

Author

Listed:
  • 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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/pol.20190019
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/pol.20190019.appx
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/pol.20190019.ds
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    File URL: https://libkey.io/10.1257/pol.20190019?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kastoryano, Stephen & Vollaard, Ben, 2022. "Nautical Patrol and Illegal Fishing Practices," Discussion Paper 2022-016, Tilburg University, Center for Economic Research.
    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. Markus Dertwinkel-Kalt & Christian Wey, 2025. "The Economics of Fleet-Wide Emission Targets and Pooling in the EU Car Market," CESifo Working Paper Series 11762, CESifo.
    5. Konishi, Yoshifumi & Kuroda, Sho, 2023. "Why is Japan’s carbon emissions from road transportation declining?," Japan and the World Economy, Elsevier, vol. 66(C).
    6. 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).
    7. Ertian Chen, 2025. "Robust Structural Estimation under Misspecified Latent-State Dynamics," Papers 2510.22347, arXiv.org, revised Nov 2025.
    8. Saugirdas Pukalskas & Dominik Adamaitis & Dainius Paliulis & Šarūnas Mikaliūnas, 2025. "Sustainability-Oriented Assessment of Passenger Car Emissions in Relation to Euro Standards Using the ECE-15 Driving Cycle," Sustainability, MDPI, vol. 17(13), pages 1-18, June.
    9. André de Palma & R. Lindsey & S. Proost & Y. Riou & A. Trannoy, "undated". "Why combating climate change is so challenging," Thema Working Papers 2025-02, THEMA (Théorie Economique, Modélisation et Applications), CY Cergy-Paris University, ESSEC and CNRS.
    10. Justin Marion & Jeremy West, 2024. "Socioeconomic Disparities in Privatized Pollution Remediation: Evidence from Toxic Chemical Spills," American Economic Journal: Applied Economics, American Economic Association, vol. 16(3), pages 219-249, July.
    11. Bjertnæs, Geir H.M., 2023. "Taxation of fuel and vehicles when emissions are constrained," Energy Economics, Elsevier, vol. 128(C).
    12. Chen, Zhou & Chen, Zhao, 2025. "Ambitious energy density requirements hinder progress: Unintended effects of new energy vehicle subsidies on battery," Energy Economics, Elsevier, vol. 144(C).
    13. Cao, Zengmin & Lu, Jian & Sun, Ruiqi, 2025. "Digital government and corporate green innovation: Evidence from “internet + government services” in China," International Review of Economics & Finance, Elsevier, vol. 103(C).
    14. 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.
    15. Geir H. M. Bjertnæs, 2021. "Taxation of fuel and vehicles when emissions are constrained," Discussion Papers 949, Statistics Norway, Research Department.
    16. Augustus Smith, 2025. "The consequences of a British combustion engine ban," Economics Series Working Papers 1083, University of Oxford, Department of Economics.
    17. Isis Durrmeyer, 2021. "Winners and Losers: The Distributional Effects of the French Feebate on the Automobile Market," Post-Print hal-03514846, HAL.
    18. 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).
    19. Reynaert, Mathias & Ale-Chilet, Jorge & Chen, Cuicui & Li, Jing, 2021. "Colluding Against Environmental Regulation," CEPR Discussion Papers 16038, C.E.P.R. Discussion Papers.
    20. Mathias Reynaert, 2021. "Abatement Strategies and the Cost of Environmental Regulation: Emission Standards on the European Car Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(1), pages 454-488.
    21. Houde, Sebastien & Aldy, Joseph E., 2017. "The Efficiency Consequences of Heterogeneous Behavioral Responses to Energy Fiscal Policies," Working Paper Series rwp17-047, Harvard University, John F. Kennedy School of Government.
    22. Durrmeyer, Isis & Martinez, Nicolas, 2022. "The Welfare Consequences of Urban Traffic Regulations," TSE Working Papers 22-1378, Toulouse School of Economics (TSE), revised Dec 2024.
    23. Tingmingke Lu, 2025. "Maximum Hallucination Standards for Domain-Specific Large Language Models," Papers 2503.05481, arXiv.org.
    24. Rik Rozendaal & Herman Vollebergh, 2025. "Policy-Induced Innovation in Clean Technologies: Evidence from the Car Market," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 12(3), pages 565-598.
    25. Kastoryano, Stephen & Vollaard, Ben, 2023. "Unseen annihilation: Illegal fishing practices and nautical patrol," Journal of Environmental Economics and Management, Elsevier, vol. 122(C).

    More about this item

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejpol:v:13:y:2021:i:1:p:372-412. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.