Working Paper: CEPR ID: DP16038
Authors: Mathias Reynaert; Jorge Alechilet; Cuicui Chen; Jing Li
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.
Keywords: collusion; regulation; pollution; automobile market; noncompliance
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Collusion on noncompliance (H26) | Lower expected penalties (K29) |
| Diffusion of responsibility (C92) | Lower expected penalties (K29) |
| Skin in the game (G52) | Lower expected penalties (K29) |
| Decreased probability of regulatory detection (L51) | Lower expected penalties (K29) |
| Collusion (D74) | Increase in industry profits (L16) |
| Collusion (D74) | Increase in consumer surplus (D11) |
| Collusion (D74) | Increased pollution damages (Q53) |
| Increased pollution damages (Q53) | Decreased social welfare (D69) |