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.
Reynaert, Mathias, and James M. Sallee.
"Who Benefits When Firms Game Corrective Policies?"
American Economic Journal: Economic Policy,
Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Economics of Regulation
Automobiles; Other Transportation Equipment; Related Parts and Equipment
Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
Climate; Natural Disasters and Their Management; Global Warming
Environmental Economics: Government Policy