NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Mathias Reynaert

Toulouse School of Economics
21 Allee de Brienne
31000, Toulouse, France

E-Mail: mathias.reynaert@tse-fr.eu
Institutional Affiliation: Toulouse School of Economics

NBER Working Papers and Publications

December 2016Corrective Policy and Goodhart's Law: The Case of Carbon Emissions from Automobiles
with James M. Sallee: w22911
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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