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Colluding Against Environmental Regulation

We study collusion among firms in response to imperfectly monitored environmental regulation. Firms improve market profits by shading pollution and evade noncompliance penalties by shading jointly. We quantify the welfare effects of alleged 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. We 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. We find that choosing small DEF tanks jointly reduced the automakers’ expected noncompliance penalties by at least 560 million euros. Antitrust and noncompliance penalties would reach between 1.46 and 14.63 billion euros to remedy the welfare damages of the alleged collusion.