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Who Benefits When Firms Game Corrective Policies?

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  • Reynaert, Mathias
  • Sallee, James M.

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

  • Reynaert, Mathias & Sallee, James M., 2016. "Who Benefits When Firms Game Corrective Policies?," TSE Working Papers 16-739, Toulouse School of Economics (TSE), revised Aug 2019.
    • Handle: RePEc:tse:wpaper:31250
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    3. Ale-Chilet, Jorge & Chen, Cuicui & Li, Jing & Reynaert, Mathias, 2021. "Colluding Against Environmental Regulation," TSE Working Papers 21-1204, Toulouse School of Economics (TSE).
    4. 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.
    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. 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.
    7. 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.
    8. 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.
    9. Konishi, Yoshifumi & Kuroda, Sho, 2023. "Why is Japan’s carbon emissions from road transportation declining?," Japan and the World Economy, Elsevier, vol. 66(C).
    10. 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.
    11. Isis Durrmeyer, 2021. "Winners and Losers: The Distributional Effects of the French Feebate on the Automobile Market," Post-Print hal-03514846, HAL.
    12. 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).
    13. Geir H. M. Bjertnæs, 2021. "Taxation of fuel and vehicles when emissions are constrained," Discussion Papers 949, Statistics Norway, Research Department.
    14. Marion, Justin & West, Jeremy, 2024. "Socioeconomic Disparities in Privatized Pollution Remediation: Evidence from Toxic Chemical Spills," Santa Cruz Department of Economics, Working Paper Series qt3d68r0jt, Department of Economics, UC Santa Cruz.
    15. Durrmeyer, Isis & Martinez, Nicolas, 2022. "The Welfare Consequences of Urban Traffic Regulations," TSE Working Papers 22-1378, Toulouse School of Economics (TSE).
    16. Bjertnæs, Geir H.M., 2023. "Taxation of fuel and vehicles when emissions are constrained," Energy Economics, Elsevier, vol. 128(C).
    17. 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.

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    More about this item

    Keywords

    gaming; corrective taxation; environmental regulation; carbon emissions; automobiles; fuel economy;
    All these keywords.

    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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