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Who Benefits When Firms Game Corrective Policies?

  • Mathias Reynaert
  • James M. Sallee
American Economic Journal: Economic Policy
vol. 13, no. 1, February 2021
(pp. 372-412)
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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.

Citation

Reynaert, Mathias, and James M. Sallee. 2021. "Who Benefits When Firms Game Corrective Policies?" American Economic Journal: Economic Policy, 13 (1): 372-412. DOI: 10.1257/pol.20190019

Additional Materials

JEL Classification

  • H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
  • L51 Economics of Regulation
  • L62 Automobiles; Other Transportation Equipment; Related Parts and Equipment
  • Q53 Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
  • Q54 Climate; Natural Disasters and Their Management; Global Warming
  • Q58 Environmental Economics: Government Policy
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