Article

Who Benefits When Firms Game Corrective Policies?

Mathias Reynaert, and James M. Sallee

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 February 2018.

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