Working Paper: NBER ID: w22911
Authors: Mathias Reynaert; James M. Sallee
Abstract: 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.
Keywords: Goodhart's Law; carbon emissions; automobiles; regulation; consumer welfare
JEL Codes: H2; L5; Q5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Gaming behavior increases private consumer surplus (D11) | consumer welfare (D69) |
| gaming (C70) | consumer surplus (D46) |
| Corrective policy induces gaming (C72) | lower prices for consumers (D41) |
| lower prices for consumers (D41) | consumer welfare (D69) |
| Aggressive policy reforms (E69) | decline in accuracy of carbon emissions ratings (F64) |