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Corrective Policy and Goodhart's Law: The Case of Carbon Emissions from Automobiles

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  • Mathias Reynaert
  • James M. Sallee

Abstract

Firms sometimes comply with externality-correcting policies by gaming the measure that determines policy. We show theoretically that such gaming can benefit consumers, even when it induces them to make mistakes, because gaming leads to lower prices by reducing costs. We use our insights to quantify the welfare effect of gaming in fuel-consumption ratings for automobiles, which we show increased sharply following aggressive policy reforms. We estimate a structural model of the car market and derive empirical analogs of the price effects and choice distortions identified by theory. We find that price effects outweigh distortions; on net, consumers benefit from gaming.

Suggested Citation

  • Mathias Reynaert & James M. Sallee, 2016. "Corrective Policy and Goodhart's Law: The Case of Carbon Emissions from Automobiles," NBER Working Papers 22911, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22911
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    References listed on IDEAS

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    Cited by:

    1. Harju, Jarkko & Kosonen, Tuomas & Slemrod, Joel, 2020. "Missing miles: Evasion responses to car taxes," Journal of Public Economics, Elsevier, vol. 181(C).
    2. Louis-Gaëtan Giraudet & Sébastien Houde & Joseph Maher, 2018. "Moral Hazard and the Energy Efficiency Gap: Theory and Evidence," Working Papers hal-01420872, HAL.
    3. Sebastien Houde & Joseph E. Aldy, 2017. "The Efficiency Consequences of Heterogeneous Behavioral Responses to Energy Fiscal Policies," CER-ETH Economics working paper series 17/282, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    4. Houde, Sebastien & Aldy, Joseph E., 2017. "The Efficiency Consequences of Heterogeneous Behavioral Responses to Energy Fiscal Policies," RFF Working Paper Series 17-24, Resources for the Future.
    5. Hunt Allcott & Christopher Knittel, 2019. "Are Consumers Poorly Informed about Fuel Economy? Evidence from Two Experiments," American Economic Journal: Economic Policy, American Economic Association, vol. 11(1), pages 1-37, February.
    6. Zou, Eric, 2017. "Unwatched Pollution: The Effect of Incomplete Monitoring on Air Quality," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258274, Agricultural and Applied Economics Association.
    7. Goeschl, Timo, 2019. "Cold Case: The forensic economics of energy efficiency labels for domestic refrigeration appliances," Energy Economics, Elsevier, vol. 84(S1).

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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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