Corrective Policy and Goodhart's Law: The Case of Carbon Emissions from Automobiles

Mathias Reynaert, James M. Sallee

NBER Working Paper No. 22911
Issued in December 2016
NBER Program(s):Environment and Energy Economics, Industrial Organization, Public Economics

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.

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Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22911

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