The Economics of Attribute-Based Regulation: Theory and Evidence from Fuel-Economy Standards

66 Pages Posted: 22 Sep 2014 Last revised: 6 Jan 2023

See all articles by Koichiro Ito

Koichiro Ito

Stanford University

James Sallee

University of Michigan at Ann Arbor

Date Written: September 2014

Abstract

This paper analyzes "attribute-based regulations," in which regulatory compliance depends upon some secondary attribute that is not the intended target of the regulation. For example, in many countries fuel-economy standards mandate that vehicles have a certain fuel economy, but heavier or larger vehicles are allowed to meet a lower standard. Such policies create perverse incentives to distort the attribute upon which compliance depends. We develop a theoretical framework to predict how actors will respond to attribute-based regulations and to characterize the welfare implications of these responses. To test our theoretical predictions, we exploit quasi-experimental variation in Japanese fuel economy regulations, under which fuel-economy targets are downward-sloping step functions of vehicle weight. Our bunching analysis reveals large distortions to vehicle weight induced by the policy. We then leverage panel data on vehicle redesigns to empirically investigate the welfare implications of attribute-basing, including both potential benefits and likely costs. This latter analysis concerns a "double notched" policy; vehicles are eligible for an incentive if they are above a step function in the two-dimensional fuel economy by weight space. We develop a procedure for analyzing the response to such policies that is new to the literature.

Suggested Citation

Ito, Koichiro and Sallee, James, The Economics of Attribute-Based Regulation: Theory and Evidence from Fuel-Economy Standards (September 2014). NBER Working Paper No. w20500, Available at SSRN: https://ssrn.com/abstract=2499342

Koichiro Ito (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

HOME PAGE: http://www.stanford.edu/~itok

James Sallee

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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