The Effect of Tightening Standards on Automakers’ Non-compliance

Abstract

This paper investigates how tightening standards can result in greater non-compliance, especially when the market and regulatory interests are misaligned. We confirm a causal relationship that explains the highly publicized auto industry non-compliance phenomenon where on-road NOx emissions exceeded standards. Based on a 15-year on-road vehicle emissions dataset covering 148,837 vehicles from 42 automakers in the EU, we use Regression Discontinuity to identify the causal impact of standards tightening on non-compliance by controlling other confounding factors. Our results suggest that in the absence of effective monitoring, tightening standards directly drives up automakers’ non-compliance. Furthermore, we find that automakers facing more intense substitution pressure from competitors or with less advanced emissions control technology have a higher non-compliance rate. Our findings speak to both policymakers as well as managers in the private sector. When setting limit-based performance goals in situations with conflicting interests and imperfect monitoring, they should anticipate non-compliance from the regulated parties. Our results suggest that tightening standards in such situations should be accompanied by stricter monitoring or other actions that discourage non-compliance.

Keywords: compliance; performance-based regulation; organization ethics; regression discontinuity; vehicle emissions