Colluding Against Environmental Regulation

59 Pages Posted: 24 May 2021 Last revised: 9 Nov 2021

See all articles by Mathias Reynaert

Mathias Reynaert

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

Jorge Alé-Chilet

Bar-Ilan University - Department of Economics

Cuicui Chen

SUNY University at Albany

Jing Li

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: April 2021

Abstract

We study collusion among firms under imperfectly monitored environmental regulation. We develop a model in which firms increase variable profits by shading pollution and reduce expected noncompliance penalties by shading jointly. We apply our model to a case with three German automakers colluding to reduce the size of diesel exhaust fluid (DEF) tanks, an emission control technology used to comply with air pollution standards. To estimate our model, we use data from the European automobile industry from 2007 to 2018. We find that jointly choosing small DEF tanks lowers the expected noncompliance penalties by at least 188-976 million euros. Smaller DEF tanks improve buyer and producer surplus by freeing up valuable trunk space and saving production costs, but they create more pollution damages. Collusion reduces social welfare by 0.78-4.44 billion euros. Environmental policy design and antitrust play complementary roles in protecting society from collusion against regulation.

Suggested Citation

Reynaert, Mathias and Alé-Chilet, Jorge and Chen, Cuicui and Li, Jing, Colluding Against Environmental Regulation (April 2021). CEPR Discussion Paper No. DP16038, Available at SSRN: https://ssrn.com/abstract=3846125

Mathias Reynaert (Contact Author)

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

Place Anatole-France
Toulouse Cedex, F-31042
France

Jorge Alé-Chilet

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel

Cuicui Chen

SUNY University at Albany ( email )

1400 Washington Avenue
Building, Room 109
Albany, NY 12222
United States

Jing Li

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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