Working paper

Colluding Against Environmental Regulation

Jorge Ale-Chilet, Cuicui Chen, Jing Li, and Mathias Reynaert

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.

Reference

Jorge Ale-Chilet, Cuicui Chen, Jing Li, and Mathias Reynaert, Colluding Against Environmental Regulation, TSE Working Paper, n. 21-1204, April 2021, revised October 29, 2021.

See also

Published in

TSE Working Paper, n. 21-1204, April 2021, revised October 29, 2021