Working Paper: CEPR ID: DP13755
Authors: Mathias Reynaert; James Sallee
Abstract: Firms sometimes comply with externality-correcting policies by gaming the measure that determines policy. This harms consumers 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, consumers benefit from gaming, even when they are fooled by it.
Keywords: gaming; corrective taxation; Goodhart's law; environmental regulation; carbon emissions; automobiles; fuel economy
JEL Codes: Q5; H2; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Gaming (L83) | Buyer Surplus (D46) |
| Gaming (L83) | Choice Distortion (D91) |
| Gaming (L83) | Price Effect (D41) |
| Price Effect dominates Choice Distortion (D11) | Buyer Surplus (D46) |
| Regulatory Stringency (L51) | Gaming (L83) |
| Gaming (L83) | Consumer Welfare (D69) |