Who Benefits When Firms Game Corrective Policies?

Mathias Reynaert and James M. Sallee

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

Date: 2021-02
New Economics Papers: this item is included in nep-cmp, nep-ene, nep-env and nep-reg
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Citations: View citations in EconPapers (17)

Published in American Economic Journal: Economic Policy, 2021, 13 (1), pp.372-412. ⟨10.1257/pol.20190019⟩

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Related works:
Journal Article: Who Benefits When Firms Game Corrective Policies? (2021)
Working Paper: Who Benefits When Firms Game Corrective Policies? (2019)
Working Paper: Who Benefits When Firms Game Corrective Policies? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03167777

DOI: 10.1257/pol.20190019

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