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.
JEL codes
- Q5: Environmental Economics
- H2: Taxation, Subsidies, and Revenue
- L5: Regulation and Industrial Policy
Replaces
Mathias Reynaert, and James M. Sallee, “Who Benefits When Firms Game Corrective Policies?”, TSE Working Paper, n. 16-739, December 2016, revised August 2019.
Reference
Mathias Reynaert, and James M. Sallee, “Who Benefits When Firms Game Corrective Policies?”, American Economic Journal: Economic Policy, vol. 13, n. 1, February 2021, pp. 372–412.
See also
Published in
American Economic Journal: Economic Policy, vol. 13, n. 1, February 2021, pp. 372–412