Firms sometimes comply with externality-correcting policies by gaming the measure that determines policy. We show theoretically that such gaming can benefit consumers, even when it induces them to make mistakes, because gaming leads to lower prices by reducing costs. We use our insights to quantify the welfare effect of gaming in fuel-consumption ratings for automobiles, which we show increased sharply following aggressive policy reforms. We estimate a structural model of the car market and derive empirical analogs of the price effects and choice distortions identified by theory. We find that price effects outweigh distortions; on net, consumers benefit from gaming.
gaming; corrective taxation; environmental regulation; carbon emissions; automobiles; fuel economy;
- H2: Taxation, Subsidies, and Revenue
- L5: Regulation and Industrial Policy
- Q5: Environmental Economics
TSE Working Paper, n. 16-739, December 2016, revised February 2018