The Danger of Tightening Standards in Driving Carmakers’ Non-Compliant Behavior – Using a Regression Discontinuity Design to Confirm Causality

43 Pages Posted: 10 Feb 2017 Last revised: 2 Sep 2019

See all articles by Kejia Hu

Kejia Hu

Vanderbilt University - Operations Management

Sunil Chopra

Northwestern University - Kellogg School of Management

Yuche Chen

National Renewable Energy Laboratory (NREL)

Date Written: September 15, 2018

Abstract

In this research, we investigate how regulations designed with positive societal intentions can lead firms to engage in unethical activities. We argue that tightening standards can drive organizations intentionally to adopt the non-compliant behavior, especially when market interests served are misaligned with regulatory interests. Based on a 15-year on-road vehicle emissions dataset covering 152,439 vehicles from 42 carmakers in the EU, we use Regression Discontinuity (a quasi-experiment design) to investigate the possible causal impact from standards tightening to non-compliance by controlling competition effects at both market and model levels. Our results suggest that tightening standards directly drives up carmakers' probability and magnitude of noncompliance. The confirmed causal relationship explains the recent publicized industry-wise noncompliance phenomenon as overshooting on-road NOx emissions in the auto market. Considering the size of the EU auto market, the estimated causal impact suggests, solely due to standards tightening, 8.5 million more vehicles in the EU emit NOx above standard limits with 7.8 kilotons excess NOx unintended but released into the air every year. If regulators ignore the potential occurrence of noncompliance due to standards tightening, our society lives with a false sense of confidence in the air quality while not taking any adequate measure to prevent such harm. Furthermore, we find such causal impact varies across carmakers. Carmakers facing more intense substitution pressure from competitors or less advanced emissions control technology choose to overshoot emissions at higher rates and magnitudes. We recommend several alternative monitoring mechanisms and market-segment policies to replace the current one-for-all tightening plan.

Keywords: Empirical Research, Environmental Operations, Public Policy, Transportation

Suggested Citation

Hu, Kejia and Chopra, Sunil and Chen, Yuche, The Danger of Tightening Standards in Driving Carmakers’ Non-Compliant Behavior – Using a Regression Discontinuity Design to Confirm Causality (September 15, 2018). Vanderbilt Owen Graduate School of Management Research Paper No. 2914746. Available at SSRN: https://ssrn.com/abstract=2914746 or http://dx.doi.org/10.2139/ssrn.2914746

Kejia Hu (Contact Author)

Vanderbilt University - Operations Management ( email )

Nashville, TN 37203
United States

Sunil Chopra

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Yuche Chen

National Renewable Energy Laboratory (NREL) ( email )

15013 Denver West Parkway
Golden, CO 80401-3393
United States

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