Mathias Reynaert and co-author Jim Sallee are currently investigating cheating in the car market. Using data from the Dutch fuel card service Travelcard, the academics have measured the real fuel consumption of vehicles on the road and compared it to car manufacturers’ claims. As Reyneart explains: “We observe from the data that real CO² emissions are much higher than in tests. In 2004, the difference between tested and real consumption was about 10%, which is normal. However, this gap has increased to about 40% over the last five years.” And the data does not simply point to Volkswagen and Renault, but to all car manufacturers present in the data.
According to Reynaert, this increase is clearly correlated to regulatory pressure which pushed firms to exploit loopholes in the test process: “In 2007, as the EU announced that the emissions of new car models would have to decrease to 130 grams of CO² per km, manufacturers had to adapt to this daunting target. However, the procedure used to establish official emission ratings, the New European Driving Cycle, leaves firms a lot of leeway to game on the test results.” National environmental taxes introduced after 2007 also added to the pressure to perform.
Just as the source of the problem appears to lie with legislators and regulators, Mathias Reynaert believes the solution lies with them too: “you could say that the regulators are to blame because they’re responsible for setting up regulation that lets car makers report their own emissions. To put an end to the gaming, the authorities need to introduce more realistic, randomized testing enforced by third parties.”
In their just-published working paper, Mathias Reynaert and James Sallee demonstrate, using the empirical example of car emissions testing and a theoretical model centered on Goodhart's Law, that policies tend to break down the self-regulation ability of an industry. The researchers believe that their economic theoretical model could prove relevant for other regulation issues.
