Who Benefits When Firms Game Corrective Policies?

52 Pages Posted: 30 May 2019 Last revised: 10 Jun 2019

See all articles by Mathias Reynaert

Mathias Reynaert

University of Toulouse 1 - Toulouse School of Economics (TSE)

James Sallee

University of California, Berkeley - Department of Agricultural & Resource Economics

Date Written: May 2019

Abstract

Firms sometimes comply with externality-correcting policies by gaming the measure that determines policy. This harms consumers 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, consumers benefit from gaming, even when they are fooled by it.

Keywords: automobiles, Carbon Emissions, corrective taxation, Environmental Regulation, fuel economy, Gaming, Goodhart's Law

JEL Classification: H2, L5, Q5

Suggested Citation

Reynaert, Mathias and Sallee, James, Who Benefits When Firms Game Corrective Policies? (May 2019). CEPR Discussion Paper No. DP13755. Available at SSRN: https://ssrn.com/abstract=3395193

Mathias Reynaert (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

James Sallee

University of California, Berkeley - Department of Agricultural & Resource Economics ( email )

Berkeley, CA 94720
United States

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