Colluding Against Environmental Regulation

The paper presented in this seminar studies collusion among firms in response to imperfectly monitored environmental regulation. Firms improve market profits by shading pollution and evade noncompliance penalties by shading jointly. The authors quantify the welfare effects of collusion among three German automakers to reduce the size of diesel exhaust fluid (DEF) tanks, an emission control technology used to comply with air pollution standards. The authors develop a structural model of the European automobile industry (2007-2018), where smaller DEF tanks create more pollution damages, but improve buyer and producer surplus by freeing up valuable trunk space and reducing production costs. It is found that choosing small DEF tanks jointly reduced the automakers' expected noncompliance penalties by at least 188--976 million euros. Collusion reduces social welfare by between 0.78 and 4.44 billion euros. Environmental policy design and antitrust play complementary roles in protecting society from collusion against regulation.